If you have an annuity — whether it's variable, fixed or equity-indexed — and you're thinking of dumping it, carefully consider the consequences of your decision, because for many of them, there's no easy way out.

There are many reasons why you may want out of your annuity. Perhaps you have several annuities you want to combine into one, or your financial situation has changed and you can no longer contribute to your annuity but certainly could use some cash. Hopefully, you're not looking to get out because you bought something you didn't fully understand.

This is what you'll typically lose by cashing out early:

• A 10 percent penalty on the taxable portion of your annuity is forfeited to the IRS if you're under age 59½. What the government gives, the government taketh away — it's the price you pay for not taking advantage of the IRS tax treatment of your annuity.
• On "fully loaded" products, surrender charges of about 7 percent in the first year, 6 percent the second year, and so on, until the charges no longer apply to withdrawals. No-load or low-load annuities usually carry smaller surrender charges.
• An annuity is treated as ordinary income, so you'll be paying taxes as you would on regular income.

Since annuities enjoy special tax treatment in the eyes of the IRS, it follows that there would be tax ramifications for cashing out. But not always. Perhaps you've heard of a "1035 transfer" that facilitates tax-free transfers. Section 1035 of the tax code allows for the tax-free exchange between like accounts: annuity to annuity, life insurance policy to life insurance policy, and life insurance policy to an annuity. However, you cannot use a 1035 transfer to go from an annuity to a life insurance policy.

If you surrender an annuity for cash and then buy another annuity, you'll still be hit with the tax penalty because the cash has passed through your hands.

For more details on the tax consequences, use Insure.com's Life insurance & annuity tax tool.

If you use an annuity to fund your IRA, which is generally discouraged, you can transfer to another IRA without a tax penalty. You have 60 days in which to do this. It's not recommended that you use an annuity to fund your IRA because the government has already given IRAs the tax-deferred status for which products like variable annuities are charging you.

Most annuities carry surrender or withdrawal fees. Anyone looking to get out of an annuity should consider waiting until the surrender charges no longer apply. If you decide to cash out of your annuity no matter what the penalty, you may be able to deduct the loss on your income taxes. Check with your tax adviser on that one.

What are your alternatives?

Look into waivers
If you need cash, get out your annuity policy and read through the section on withdrawals or waiver benefits. Some annuity contracts, but not many, contain waivers that allow you access to some or all of your money in the event of disability, nursing home confinement, or terminal illness. A few insurers might allow you to withdraw up to 10 to 15 percent of your annuity without penalty under certain circumstances.

Change your fund allocation
Variable annuities grow through gains in investment subaccounts. You choose the distribution of your funds into these accounts. Consider changing your fund allocation to take advantage of the current market. This will not trigger a tax liability and has traditionally been a big selling point of variable annuities.

Slide into an immediate annuity
If you're thinking about early retirement (prior to age 59½), you might consider rolling your variable annuity into an immediate annuity. By doing so, you're not really getting out of your annuity, you're just changing the type of annuity. Although there are still expenses associated with immediate annuities, they do guarantee a lifetime income. And, increasingly, insurance companies are adding options by making adjustments for inflation to your payouts and providing easier access to your assets. Of course, these options come with a price, and it shows up in higher fees.