Annuity Loans: Can You Borrow Against an Annuity?

ⓘ Important Disclosures

All annuity guarantees are subject to the claims-paying ability of the issuing insurance company. Annuities are not FDIC-insured and are not bank products. Variable annuities are securities products regulated by FINRA and the SEC. This content is for informational purposes only and does not constitute financial, tax, or legal advice.

When an unexpected expense arises — medical bills, home repairs, a family emergency — many retirees look at their annuity balance and wonder: can I borrow against this? The answer depends on what type of annuity you have, how it is funded, and whether a loan is actually your best option. This guide explains the mechanics, the real costs, and when it makes sense.

What Is an Annuity Loan and How Does It Work?

A true annuity loan — where you borrow directly from the annuity contract and repay with interest — is only available from certain qualified annuities held inside employer-sponsored retirement plans such as 403(b) plans. Most individual annuity contracts do not offer direct borrowing.

For most individual annuity owners, "borrowing against an annuity" means one of two things: taking a partial surrender (withdrawal) from the contract, or using the annuity as collateral for an external loan from a bank or lender. Each has distinct tax and financial consequences.

Types of Annuities You Can Borrow Against

Annuity Type	Direct Loan Available?	Alternative Options
403(b) / Qualified plan annuity	Sometimes — plan rules vary	Plan loan up to IRS limits
IRA annuity	No — IRAs cannot have loans	60-day rollover (once per year); partial withdrawal
Non-qualified deferred annuity	No	Partial surrender; collateral assignment
Immediate annuity (SPIA)	No	Structured settlement sale (regulated; typically not recommended)

Qualified vs. Non-Qualified Annuities

This distinction drives the tax consequences of any withdrawal or loan:

Qualified annuities (funded with pre-tax IRA, 403(b), or 401(k) dollars) — withdrawals are 100% taxable as ordinary income. A 10% IRS early withdrawal penalty applies before age 59½.
Non-qualified annuities (funded with after-tax dollars) — only the earnings are taxable on withdrawal, calculated via the exclusion ratio. The 10% penalty still applies before 59½ on the taxable portion.

Using Your Annuity as Collateral

Some lenders will accept a non-qualified deferred annuity as collateral for a personal or secured loan. The annuity is assigned to the lender; if you default, the lender can surrender the contract to recover the loan balance.

Critical tax risk: The IRS may treat a collateral assignment of a non-qualified annuity as a taxable distribution — triggering ordinary income tax on the earnings and potentially the 10% penalty. This is a complex area. Do not use an annuity as collateral without written tax guidance from a qualified professional.

Pros and Cons of Annuity Loans and Withdrawals

	Pros	Cons
Qualified plan loan	No immediate tax; repayment rebuilds account value	Repayment required; default triggers full taxation + penalty; limited to plan rules
Partial withdrawal	Immediate access to funds; simple process	Surrender charges if over free-withdrawal limit; taxes owed; reduces future income
Collateral loan	Keeps annuity contract intact if repaid	Possible immediate taxation; default risk; complex documentation

What Happens if You Default on an Annuity Loan?

For a qualified plan loan: the outstanding balance is treated as a taxable distribution in the year of default — subject to ordinary income tax and, if under age 59½, the 10% early withdrawal penalty. This can result in a large, unexpected tax bill.

For a collateral loan: the lender surrenders the annuity. The entire surrender value (up to the loan balance) is recovered by the lender; any remaining value returns to you, minus surrender charges and taxes owed.

When Does It Make Sense?

Accessing annuity value — through loans or withdrawals — is generally a last resort. Before doing so, consider whether other liquid assets (savings, taxable brokerage accounts, home equity) can cover the need with fewer tax consequences. Your annuity's guaranteed income value is often worth more over a long retirement than the short-term liquidity it provides.

If you do need access, withdrawing up to the annual free-withdrawal allowance (typically 10% of contract value) avoids surrender charges and is the least disruptive option for most deferred annuity contracts.

Frequently Asked Questions

Can I take a loan from my IRA annuity?

No. The IRS prohibits loans from IRAs regardless of whether the IRA holds an annuity or other investments. Taking money from an IRA is a distribution — taxable and potentially subject to the 10% early withdrawal penalty if you are under age 59½. A 60-day rollover (allowed once per 12-month period) can temporarily provide access without immediate taxation if repaid in time.

What is the free withdrawal allowance in an annuity?

Most deferred annuity contracts allow you to withdraw up to 10% of the account value per year during the surrender period without triggering a surrender charge. This is called the free-withdrawal provision. Amounts beyond 10% are subject to the surrender charge schedule. Confirm your specific contract terms before making any withdrawal.

Are there surrender charges on annuity withdrawals?

Yes, if you withdraw more than the free-withdrawal allowance during the surrender period. Surrender charges typically start at 7%–10% in the first contract year and decline to 0% over 5–10 years. After the surrender period ends, withdrawals are not subject to surrender charges — though taxes still apply.

What are the tax consequences of withdrawing from a non-qualified annuity?

Withdrawals from non-qualified annuities are taxed on the earnings portion first (LIFO — last in, first out). The earnings are taxed as ordinary income. If you are under age 59½, a 10% IRS early withdrawal penalty applies to the taxable portion. Consult a tax advisor before taking any significant withdrawal.

Is a 403(b) annuity loan a good idea?

It depends on your situation. Qualified plan loans avoid immediate taxation and can be repaid, restoring the account value. However, if you leave your employer or cannot repay, the balance becomes a taxable distribution. The opportunity cost of money leaving your tax-deferred account should also be weighed carefully.