Can I Borrow from My Annuity for a House Down Payment?

Yes, but you will owe fees and penalties

Reviewed by Ebony Howard
Fact checked by Kirsten Rohrs Schmitt

You can borrow from your annuity to put a down payment on a house, but you should be prepared to pay fees and possible penalties. For this reason, when you’re figuring out how to fund your down payment, borrowing from an annuity should be a last resort.

Key Takeaways

• When borrowing from an annuity, be prepared to pay fees and penalties.
• The insurance company levies a penalty, called a “surrender charge,” on early withdrawals from an annuity.
• You may be able to borrow from the annuity without paying a penalty if you’ve held the contract long enough.

How Annuities Work

An annuity is a unique investment vehicle that it is managed by a life insurance company rather than a traditional brokerage house. One way to purchase an annuity: You deposit money into an annuity during your working years, and the growth is tax-deferred until you begin taking distributions or withdrawals 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 the peace of mind it can offer: regular, guaranteed income throughout your retirement years. However, the product comes with many drawbacks. The biggest is your inability to withdraw money before age 59½ without incurring heavy fees and penalties—much like any other retirement account, such as a 401(k) or an individual retirement account (IRA).

Important

Annuities are investment vehicles managed by life insurance companies that can provide retirees with income in retirement.

IRS Rules

The Internal Revenue Service (IRS) will penalize you for withdrawing from an annuity before you turn age 59½. 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 You also have to pay the ordinary income taxes, which were deferred to that point, on the withdrawn money.

However, the IRS grants exemptions to this penalty, including if you are buying or building your first home and borrow from an annuity for the down payment. Also, with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, you’re allowed to withdraw $5,000 to be used for the cost of childbirth or adoption as long as it’s within one year of the child’s birth or finalization of the adoption. Although the exemptions are penalty-free, you will still be liable for the ordinary income tax for any of the withdrawal amounts.

Surrender Charges

The insurance company also levies its own penalty, called a surrender charge, on early withdrawals, and this can be as high as 20%. Unlike the IRS, insurance companies do not waive surrender charges for any individual financial circumstances, such as buying a first home.

Annuities are structured in several different ways, and some are sold without surrender charges. You may also be able to borrow from the annuity without paying a penalty if you’ve held the contract long enough. The contract specifies the surrender period, which is the number of years you’ll be liable for a surrender charge. The interest rate on this fee generally declines over time.

What Is an Annuity?

An annuity is a contract between an annuity owner and an insurance company that guarantees regular payments for a certain period, such as for the rest of the annuitant’s life, and sometimes longer (for example, until the annuitant’s spouse has died).

What Types of Annuities Are There?

There are several types of annuities. With immediate payment annuities, the payout happens right away. Deferred payment annuities pay out after a certain length of time has passed. Fixed annuities pay a set amount, whereas what variable annuities pay rises and falls with the market.

What Is a Downpayment?

A downpayment is a sum of money that is used to purchase a large item, such as a vehicle or a home. It’s liquid money—that is, cash-equivalent.

The Bottom Line

While it’s possible to use money from your annuity as a downpayment for a house, it’s typically not a good idea to do so. Taking money from your annuity will likely result in fees and charges, which will eat into your money for the downpayment. Consider other options before this one.