Can You Borrow From an Annuity? Loans, Withdrawals, and Better Options

The short answer: most annuities don't let you borrow from them, and trying to borrow against one can hand you a tax bill for money you never actually received. True loan provisions exist mainly in annuities held inside employer retirement plans. For everyone else, the contract's built-in liquidity features — free withdrawals and waiver riders — are almost always the cheaper path to cash.

Here's how the loan rules actually work, where the tax traps sit, and what to use instead.

Which Annuities Have Loan Provisions

Whether you can borrow depends on how the annuity is held, not how much it's worth.

• Non-qualified deferred annuities — contracts bought with after-tax money, like a MYGA or fixed indexed annuity — almost never include a loan feature. Carriers design liquidity around the free withdrawal allowance instead. Our non-qualified annuity guide covers how these contracts are taxed.
• Tax-sheltered annuities in employer plans — mainly 403(b) contracts used by teachers, hospital workers, and nonprofit employees — often do permit loans, because the federal plan-loan rules allow them. Loans are generally capped at the lesser of $50,000 or half your vested balance, and generally must be repaid within five years with level payments made at least quarterly.
• Annuities inside an IRA can never be borrowed from. Federal law prohibits IRA loans entirely — borrowing from an IRA, or pledging it as collateral, disqualifies the amount involved and makes it taxable. See what a qualified annuity is for how these accounts differ.
• Annuitized contracts — annuities already converted into a payment stream — have no account value to borrow against at all. The asset is the income stream itself, which is why some owners look at selling annuity payments, a step with its own serious costs.

The Tax Trap: Loans and Pledges Against Non-Qualified Annuities

Suppose a lender would take your annuity as collateral, or a carrier offered some form of advance. For a non-qualified contract, the tax code closes this door hard: any amount you receive as a loan under the contract, or assign or pledge as security for a loan, is treated as if you withdrew it.

That deemed distribution follows the normal annuity ordering rules — gains come out first and are taxed as ordinary income. If you're under 59½, the taxable portion generally also owes the 10% additional federal tax covered in our guide to the annuity early withdrawal penalty. So pledging a contract with substantial built-up gains can create a tax bill on money that's still sitting inside the annuity. This is why banks generally refuse annuities as collateral, and why "borrowing against your annuity" is mostly a phrase from sales pitches, not a real feature.

How 403(b) Annuity Loans Work — and How They Go Wrong

Inside a 403(b), a loan can be a legitimate tool. You borrow against your own balance, repay it with interest back into your account, and owe no tax as long as the loan stays within the limits and on schedule. The contract keeps crediting interest on the non-loaned portion, and there's no credit check.

The failure mode is default. Miss the repayment schedule — commonly after leaving the job, when repayment often accelerates — and the outstanding balance becomes a deemed distribution: ordinary income tax, plus the 10% additional federal tax if you're under 59½, on money you already spent. The defaulted amount also loses its tax-deferred status permanently. If a loan is on the table, make sure the repayment plan survives a job change before you sign.

The Built-In Alternative: Free Withdrawals and Waivers

Most deferred annuities already include the liquidity people go looking for in a loan. The free withdrawal provision lets you take a portion of the contract value each year — commonly around 10%, though your contract sets the exact allowance — without surrender charges. Waiver riders go further: many contracts waive surrender charges entirely for qualifying events like nursing home confinement or terminal illness.

"Free" means free of surrender charges, not free of tax. Withdrawals from a deferred annuity come out gains-first as ordinary income, and the under-59½ additional tax can apply. The full picture lives in our guide to annuity taxation.

If You Need More Than the Contract Allows

When the free withdrawal allowance isn't enough, work down the cost ladder rather than jumping straight to a surrender. A partial surrender takes the charge only on the amount above your allowance. A full surrender pays the charge on everything and can add a market value adjustment on top — our guide to market value adjustments explains how that swings the number. And check your surrender schedule first: charges step down each year, so waiting even one contract anniversary can meaningfully change the math laid out in our surrender charges guide.

If the real problem is that you want out of the contract entirely — not just a slice of cash — that's a different decision with its own playbook: see how to get out of an annuity. And if the contract is fine but the rate is stale, a tax-free 1035 exchange into a better contract solves that without taking taxable cash at all — compare current MYGA rates and recent carrier rate changes before deciding.

The Bottom Line

Annuities are built for income, not borrowing. If yours is a 403(b) contract, a plan loan can work — respect the repayment schedule. For everything else, treat "borrow from your annuity" as a warning sign: the free withdrawal allowance, waiver riders, and a well-timed partial surrender will almost always cost less than a deemed distribution or a panicked full surrender.

Before you take money out of any annuity, get the surrender value, the remaining schedule, and your free withdrawal allowance from the carrier in writing — then compare the true cost of each exit against what the money will do next.