What Happens When an Annuity Matures?

If you own a deferred annuity, there's a date quietly printed in your contract that could reshape your retirement income — your annuity maturity date. Many annuity holders purchase their contracts decades before this date arrives and then forget about it entirely. When that date finally comes, the decisions you make can mean the difference between a comfortable retirement income stream and an unexpected tax bill.

Understanding what happens when an annuity matures puts you in control. Below, you'll find a complete breakdown of the maturity process, your available options, the tax implications you need to plan for, and actionable steps to make the most of your money.

What Does "Annuity Maturity" Actually Mean?

When you purchase a deferred annuity, your contract has two distinct phases. The first is the accumulation phase, during which your premiums grow on a tax-deferred basis. The second is the distribution phase, when you begin receiving payments.

Your annuity maturity date marks the end of the accumulation phase. It's the contractual deadline by which the insurance company requires you to decide what to do with your accumulated funds. This date is set when you buy the contract, and it's typically tied to a specific age — often between 85 and 115, depending on the insurer and state regulations.

The maturity date is not the same as a surrender period ending. Your surrender period — the window during which early withdrawals incur penalties — often ends years or even decades before your maturity date. Once the surrender period ends, you can access your funds penalty-free, but the contract itself continues growing tax-deferred until maturity.

Why Your Maturity Date Matters More Than You Think

Here's where many annuity owners run into trouble: they assume they can simply let the contract sit indefinitely. But when your annuity maturity date arrives, your insurance company will require action. If you don't make a decision, the insurer typically defaults to one of two outcomes — either automatically annuitizing your contract (converting it into a stream of payments) or issuing a lump-sum distribution.

Both of these default outcomes can carry serious tax consequences. A lump-sum payout, for example, could push you into a significantly higher tax bracket in a single year. An automatic annuitization might lock you into payment terms that don't align with your needs.

The takeaway: ignoring your maturity date hands control of your money to the insurance company. Planning ahead keeps that control firmly in your hands.

Your Options When an Annuity Matures

When your annuity reaches its maturity date, you generally have four primary options. Each comes with distinct financial and tax implications, so it's worth understanding all of them before making a decision.

Option 1: Annuitize Your Contract

Annuitization converts your accumulated value into a guaranteed income stream. You can typically choose from several payout structures:

• Life only: Payments continue for as long as you live. This provides the highest monthly payment but stops when you pass away.
• Life with period certain: Payments last for your lifetime, with a guaranteed minimum period (such as 10 or 20 years). If you pass away during the guaranteed period, your beneficiary receives the remaining payments.
• Joint and survivor: Payments continue for the lifetime of you and a second person, usually a spouse.
• Period certain only: Payments last for a fixed number of years regardless of whether you're living.

Annuitization provides predictable, guaranteed income, which can be valuable if you're concerned about outliving your savings. However, once you annuitize, the decision is typically irreversible — you can't access a lump sum later if your needs change.

Option 2: Take a Lump-Sum Withdrawal

You can choose to withdraw the entire accumulated value of your annuity as a single payment. This gives you maximum flexibility — you can reinvest the money, use it for a large purchase, or distribute it as you see fit.

The downside is taxes. All earnings above your cost basis (the total premiums you paid into the contract) are taxed as ordinary income in the year you receive the lump sum. If your annuity has grown significantly over decades, this could result in a substantial tax bill. For example, if you invested $100,000 and your annuity is now worth $250,000, the $150,000 in gains would be taxed at your ordinary income rate.

A lump-sum withdrawal can also affect your Medicare premiums. Because Medicare Part B and Part D premiums are income-based, a large one-time withdrawal can trigger higher premiums through the Income-Related Monthly Adjustment Amount (IRMAA).

Option 3: Execute a 1035 Exchange

A 1035 exchange allows you to transfer the full value of your matured annuity into a new annuity contract — without triggering any taxes. Named after Section 1035 of the Internal Revenue Code, this strategy preserves your tax-deferred growth and gives you a fresh contract with potentially better rates, features, or riders.

This option makes sense if you want to continue deferring taxes, if current annuity products offer better terms than your matured contract, or if you'd like to add features such as a long-term care rider that your old contract didn't include.

Important: A 1035 exchange must be handled correctly. The funds must transfer directly from one insurance company to another — they should never pass through your hands. Work with your financial professional to ensure the exchange is properly executed to maintain its tax-free status.

For more details on annuity transfers, read our guide on transferring annuities to another person.

Option 4: Extend the Contract

Some insurance companies allow you to extend your annuity contract beyond the original maturity date. This means your funds continue to grow tax-deferred, and you delay having to make a distribution decision.

Not all insurers offer this option, and the terms of an extension can vary. The interest rate on an extended contract may differ from what you were earning before maturity. Additionally, state regulations may limit how long an insurer can extend a contract, particularly as you approach advanced ages.

If extension is available and the terms are favorable, it can be a simple way to keep your money working for you while you evaluate your other options.

Tax Implications You Need to Understand

Tax treatment is one of the most critical factors in your maturity decision. Here's what you need to know:

Annuities follow a "last in, first out" (LIFO) rule for withdrawals. This means that when you take money out, the IRS considers the earnings (gains) to come out first. Since earnings are taxed as ordinary income, your initial withdrawals are fully taxable until you've withdrawn all of the gains. Only after that do you begin withdrawing your original premium, which is not taxed.

Annuitization spreads the tax burden. When you annuitize, each payment you receive is split into two components — a taxable portion (earnings) and a non-taxable portion (return of premium). This is determined by an exclusion ratio, which spreads your cost basis across the expected number of payments. The result is a lower tax hit in any single year compared to a lump-sum withdrawal.

1035 exchanges are tax-free. No taxes are due at the time of the exchange. Your cost basis carries over to the new contract, and taxes are deferred until you eventually take distributions from the new annuity.

Early withdrawals before age 59½ carry a 10% penalty. If your annuity matures before you reach age 59½ (uncommon but possible with some contracts), any taxable withdrawals will also be subject to a 10% early withdrawal penalty from the IRS, in addition to ordinary income tax.

How to Minimize Your Tax Exposure

• Spread withdrawals across multiple years rather than taking a lump sum, to avoid a spike in your tax bracket.
• Use a 1035 exchange to defer taxes entirely if you don't need the income right away.
• Consider annuitization for its favorable exclusion ratio if you want steady retirement income.
• Consult a tax professional before making any distribution decision. The interaction between annuity payouts, Social Security, and Medicare premiums can be complex.

How to Plan Ahead for Your Annuity Maturity Date

The best time to start planning for your annuity maturity is years before it arrives. Here's a practical checklist:

Step 1: Locate Your Maturity Date

Pull out your annuity contract and find the maturity date. If you can't locate it, call your insurance company directly. Make a note of this date and set a reminder for at least 12 months before it arrives.

Step 2: Review Your Current Financial Picture

Before choosing a maturity option, assess your overall financial situation. Consider your other income sources (Social Security, pensions, investments), your anticipated expenses in retirement, and your current tax bracket. This context will help you determine which option aligns best with your needs.

Step 3: Compare Current Annuity Products

If you're considering a 1035 exchange, research what's available in today's market. Interest rates, fee structures, and rider options change over time. A product that didn't exist when you purchased your original annuity might be a better fit now.

Visit our annuities overview page to explore the types of annuities available and how they compare.

Step 4: Talk to a Financial Professional

Annuity maturity decisions involve tax law, insurance contract terms, and retirement income planning — a combination that benefits from professional guidance. A qualified advisor can model different scenarios and help you understand the long-term impact of each option.

If you'd like personalized guidance, contact our team to schedule a consultation.

Step 5: Communicate Your Decision to the Insurer

Once you've made your choice, contact your insurance company well before the maturity date to communicate your decision and complete any required paperwork. Don't wait until the last minute — administrative processes take time, and missing your window could result in a default action you didn't want.

What Happens to Your Annuity If You Pass Away Before Maturity?

If you die before your annuity matures, the contract's death benefit typically pays out to your named beneficiary. The amount and tax treatment depend on the type of annuity and the specific contract terms.

For a detailed look at beneficiary options and tax treatment, read our guide on what happens to an annuity when you die.

Common Mistakes to Avoid

Ignoring the maturity date. This is the most common and most costly mistake. Automatic actions by the insurer rarely align perfectly with your financial goals.

Taking a full lump sum without considering the tax impact. A large one-time withdrawal can push you into a higher bracket and increase your Medicare premiums for the following year.

Failing to compare 1035 exchange options. If you're going to move into a new contract, shop around. Rates, fees, and features vary significantly between insurers.

Not coordinating with your overall retirement plan. Your annuity maturity decision should fit within your broader retirement income strategy — not be made in isolation.

Final Thoughts

Your annuity maturity date is not a deadline to dread — it's an opportunity to reassess your financial plan and make a decision that serves your retirement goals. Whether you choose to annuitize for guaranteed income, take a lump sum for flexibility, execute a 1035 exchange for continued tax deferral, or extend your contract for more time, the key is to plan ahead and act deliberately.

Start by locating your maturity date, reviewing your financial picture, and speaking with a qualified professional. The decisions you make at maturity can shape the quality of your retirement for years to come — make them count.

Explore your annuity options or get in touch with our team to start planning for your annuity's maturity today.