You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. In fact, when figuring a way to fund your down payment, borrowing from an annuity should be a method of last resort.
How Annuities Work
An annuity is a unique investment vehicle in that it is managed by a life insurance company rather than a traditional brokerage house. You deposit money into an annuity during your working years, and the growth is tax-deferred until you begin taking distributions at retirement. At this point, both principal and interest are returned to you in a series of regular payments.
Penalties and Surrender Charges
The benefit of an annuity is it offers peace of mind in the form of regular, guaranteed income throughout your retirement years. However, the product comes with many drawbacks. The biggest is your inability to withdraw money before age 59.5 without incurring heavy fees and penalties.
The Internal Revenue Service (IRS) is the first to penalize you for withdrawing from an annuity before reaching age 59.5. Typically, you face a 10% tax on any money you withdraw early. You also have to pay the ordinary income taxes, which were deferred to that point, on the withdrawn money.
If you are buying or building your first home and borrowing from an annuity for the down payment, the IRS grants an exemption to the penalty tax. However, this exemption does not apply to the ordinary income tax.
The insurance company levies its own penalty, called a surrender charge, on early withdrawals, and this can be as much as 20%. Unlike the IRS, insurance companies do not waive surrender charges so you can buy your first home.