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

You can borrow from your annuity to put a down payment on a house, but you should be prepared to pay interest on the borrowed funds, fees, and possible 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 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).

IRS Rules

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 You also have to pay the ordinary income taxes, which were deferred to that point, on the withdrawn money.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