What happens if an annuity owner surrenders the annuity before age 59 ½?

When an annuity owner surrenders the annuity before reaching the age of 59 ½, they trigger certain tax implications due to IRS regulations. The growth of the annuity is considered taxable income. This means that any earnings accrued in the annuity up to the point of surrender are subject to income taxes.

In addition to the normal income tax on the growth, there can also be a penalty applied for early withdrawal. Specifically, the IRS imposes a 10% additional tax penalty on the taxable portion of the annuity if the owner is under 59 ½ at the time of surrender. This is designed to discourage early access to retirement savings before that age, as annuities are typically considered long-term investment vehicles.

The other choices do not accurately reflect the consequences of surrendering an annuity early. While a return of the initial investment is possible, it does not account for the tax obligations on growth, thus leaving option B as the most comprehensive and correct answer regarding the tax implications and early withdrawal penalties.