Like fixed deferred annuities, indexed annuities have penalties for early withdrawals. Surrender charges typically decline over the length of the surrender charge period (typically five to 10 years). This charge covers the insurance company in case the market declines and the policy loses money; however, some contracts allow partial withdrawals once or twice during the year.
Withdrawals before age 59 1/2 may also be subject to a 10 percent federal tax penalty, in addition to any income taxes that may be due.
Indexed annuity contracts also usually have a vesting schedule, which is the amount of earnings the holder receives after an early withdrawal. Some indexed annuities will credit none of the index-linked interest or only part of it, if money is taken out prematurely. The percentage vested, or credited, generally increases as the term comes closer to the end and is always 100 percent at the end of the term.
Surrender charges and vesting schedules limit liquidity and short-term investing in indexed annuity contracts, which is the intent.
