MetLife Annuity: Taxes, Surrender Charges, and RMDs

A MetLife annuity’s taxes, fees, and withdrawal rules follow the same federal framework that governs any deferred annuity: earnings grow untaxed until you pull them out, withdrawals of those earnings are taxed as ordinary income, and taking money before age 59½ generally adds a 10% federal penalty on top. Fees depend on the contract type. Variable annuities can run roughly 3% a year once you stack the mortality and expense charge, sub-account expenses, and rider fees; fixed and fixed indexed contracts bury their cost in the credited rate. Most contracts let you withdraw around 10% of contract value each year without a surrender charge, and anything above that triggers a surrender fee that typically starts at 7% to 9% and phases out over seven to nine years.

One piece of context before the details. MetLife spun off much of its individual retail annuity business into Brighthouse Financial in 2017, so many older individual MetLife contracts are now serviced by Brighthouse. MetLife still issues annuities primarily through employer-sponsored plans and maintains several individual variable annuity product lines. If your contract was issued before the spinoff, check the servicer on your statement before applying any of the operational steps below.

What You Pay to Own the Contract

Fee structure depends on which of the three product families you hold.

Variable annuities are the most expensive. The mortality and expense risk charge, commonly around 1.25% a year, compensates the insurer for the death benefit guarantee and administrative costs. On top of that sits the expense ratio inside each investment sub-account, which works like a mutual fund fee. Any optional rider, such as a guaranteed lifetime withdrawal benefit, adds another 0.25% to 1.0% of contract value per year. Federal securities law requires the insurer to give you a prospectus laying out those sub-account options, fees, and risks before you invest.¹

Fixed annuities pay a guaranteed interest rate that will not drop below the contractual minimum. Fixed indexed annuities credit interest tied to a market index like the S&P 500, with a floor that stops your value from falling when the index does and a cap or participation rate that limits the upside.² Neither type breaks out fees the way a variable contract does. The insurer’s cost is baked into the spread between what it earns on your money and what it credits to your account. Less transparent, generally less drag.

All three families can carry surrender charges. Those work as their own set of withdrawal rules and are covered below.

How Withdrawals Are Taxed Before You Annuitize

The tax treatment of a withdrawal depends on whether the contract is qualified or non-qualified.

A non-qualified annuity is funded with after-tax money. Because you already paid income tax on the dollars going in, only the earnings portion is taxable when it comes out. But the IRS applies an earnings-first rule to withdrawals before the annuity starting date: your money is treated as coming out of investment gains until every dollar of earnings is gone, and only then does it start returning your original contributions tax-free. The statutory basis is IRC Section 72(e).³ Withdrawn earnings are taxed as ordinary income at your marginal rate.

A qualified annuity sits inside a traditional IRA, 401(k), 403(b), or similar plan. Contributions went in pre-tax, so neither the principal nor the growth has been taxed. Every dollar coming out is ordinary income in the year you receive it.

The insurer reports all distributions to the IRS on Form 1099-R.⁴

How Annuitized Payments Are Taxed

Annuitization is the point where you convert your accumulated balance into a stream of periodic payments. It is generally irreversible.

Once payments begin on a non-qualified contract, each check contains a mix of taxable earnings and a tax-free return of your original investment. The IRS sets that split using the exclusion ratio: your total investment in the contract divided by the expected return over the payout period, with expected return based on IRS actuarial tables and your life expectancy.⁵

If you invested $50,000 and the expected return is $200,000, your exclusion ratio is 25%. That 25% of each payment comes back tax-free; the other 75% is taxable as ordinary income. The ratio stays constant per payment, but it does not last forever. Once you have recovered your entire original investment through the tax-free portions, every subsequent payment is fully taxable.⁵ If you die before recovering your full cost, the unrecovered amount can be claimed as a deduction on your final return.

Non-qualified annuities use the General Rule in Publication 939. Qualified annuities from employer plans use the Simplified Method in Publication 575.⁶

The 10% Early Withdrawal Penalty

Pull money from any annuity before age 59½ and the IRS adds a 10% penalty on top of the regular income tax on the taxable portion. Qualified or non-qualified, the rule applies.⁷

IRC Section 72(q)(2) lists exceptions that eliminate the penalty even under 59½:

Distributions to a beneficiary after the owner’s death.
Distributions after the owner becomes permanently disabled as defined by the tax code.
A series of substantially equal periodic payments based on life expectancy. Once started, the payments must continue for at least five years or until you reach 59½, whichever is longer. Stopping early triggers retroactive penalties.
Payments from an immediate annuity, meaning a contract that begins paying out right away.

The 10% penalty is separate from any surrender charge the insurer may assess.³ Withdrawing early can hit you from both sides.

Surrender Charges and the Free Withdrawal Allowance

Most MetLife contracts let you take out a limited amount each year without a surrender charge. The annual free withdrawal allowance is commonly 10% of accumulated value.⁸ Income tax and, if you are under 59½, the 10% penalty still apply to that withdrawal. The insurer just does not tack on its own charge.

Anything above the free amount, or a full surrender, triggers the surrender charge. MetLife surrender charges typically start between 7% and 9% in the first contract year and step down to zero over roughly seven to nine years.⁸ Some contracts use longer periods. The exact schedule is in your contract.

Certain fixed annuities also apply a market value adjustment when you surrender. If interest rates have risen since you bought the contract, the MVA cuts your surrender value; if rates have fallen, it raises it. The trade-off is that the MVA usually comes with a higher initial credited rate.

Many contracts waive surrender charges under hardship conditions. A common version requires at least 90 consecutive days of nursing home or hospital confinement, starting after the first contract anniversary, before the waiver applies. Terminal illness waivers also exist. Both usually require written physician certification and must be claimed within a set window. Not every contract includes these riders, and the qualifying conditions vary, so check your contract or call MetLife before assuming coverage.

Required Minimum Distributions for Qualified Contracts

If your MetLife annuity is inside a qualified retirement account, RMDs begin the year you turn 73.⁹ Under SECURE 2.0, that age rises to 75 beginning in 2033. Non-qualified annuities are not subject to RMD rules.

Missing an RMD is expensive. The excise tax on the shortfall is 25% of the amount you failed to withdraw, dropping to 10% if you catch it and take the distribution within two years.⁹

One planning tool inside a qualified account is the qualified longevity annuity contract, or QLAC. You can use up to $210,000 of qualified money to buy a deferred annuity that does not start paying until as late as age 85.¹⁰ Money inside a QLAC is excluded from the RMD calculation until payments begin, which lowers the amount you must withdraw each year in early retirement.

Trading One Annuity for Another: 1035 Exchanges

If your current annuity carries high fees, weak investment options, or a rider that no longer fits, you can swap it for a different annuity contract without triggering a taxable event. This is a Section 1035 exchange. The same section also allows exchanging an annuity for a qualified long-term care insurance policy.¹¹

The owner must stay the same on both contracts. A 1035 exchange cannot move an annuity to a different person. Partial exchanges draw extra scrutiny: if you split one annuity into a new contract and then withdraw money from either contract within 24 months, the IRS may treat the whole transaction as a taxable distribution.

The exchange does not reset cost basis. Your original investment carries over to the new contract, preserving the tax-free recovery of your contributions. If the old contract still has time left on its surrender charge schedule, those charges will apply when the transfer happens, and the cost can easily outweigh the benefit of switching. Run the numbers first.

What Happens to the Annuity at Death

When an annuity owner dies during the accumulation phase, the death benefit passes to the named beneficiary. At minimum, it equals contract value at death. Variable annuities often guarantee that the death benefit will not be less than total premiums paid, even if the sub-accounts have lost money. Enhanced death benefit riders exist for an extra annual fee.

Annuities do not receive a step-up in basis at death. Section 1014, which normally gives inherited property a new basis equal to fair market value at death, explicitly excludes annuities.¹² The beneficiary inherits the owner’s original cost basis, and all accumulated growth is taxable as ordinary income when it comes out. This is one of the biggest tax disadvantages of leaving an annuity to heirs.

For non-qualified contracts, if the owner dies before the annuity starting date, the entire contract value must generally be distributed within five years of death under IRC Section 72(s). A designated beneficiary can instead stretch payments over their own life expectancy if distributions begin within one year of the owner’s death. A surviving spouse gets the most favorable treatment: the spouse can continue the contract as their own, preserving tax deferral indefinitely.³ If the owner dies after annuitization has begun, remaining payments must continue at least as rapidly as they were being made at the time of death. A lump-sum payout is taxable to the extent it exceeds the owner’s unrecovered cost.⁶

Qualified annuities inside IRAs or employer plans follow the beneficiary rules of those accounts rather than Section 72(s). Under SECURE and SECURE 2.0, most non-spouse beneficiaries must withdraw the entire balance within 10 years of the owner’s death. Spousal beneficiaries can still roll the account into their own IRA and treat it as their own.

1
eCFR. 17 CFR 230.498A – Summary Prospectuses for Variable Annuity and Variable Life Insurance Contracts
2
FINRA. The Complicated Risks and Rewards of Indexed Annuities
3
Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
4
Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
5
Internal Revenue Service. Publication 939 (12/2025), General Rule for Pensions and Annuities
6
Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income
7
Office of the Law Revision Counsel. 26 U.S.C. 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
8
MetLife. Annuities: Answering Your Questions About Annuities
9
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
10
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs
11
Office of the Law Revision Counsel. 26 U.S. Code 1035 – Certain Exchanges of Insurance Policies
12
Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent