in too deep on this one

How do I minimize the damage from an 'individual flexible premium deferred variable annuity contract' through pacific life that is also an IRA ?

It's past the date on the contract where you can just send it back, I didn't find out that this had been done until AFTER that date.

If we cash anything out it's taxed as income + the penalty and fees so we will lose half the face value if we try to access the funds.

Is there anyway to remove funds and put them somewhere and NOT pay for withdrawals as if they are income ?

Thankfully, it is an IRA.

You can simply roll the funds into another IRA with another institution (direct rollover). You will not have to pay any taxes on the transfer. This is called an institution to institution transfer. The check is made out to the new institution "for benefit of" the IRA owner. Pick a new investment vehicle, contact the institution, and they should be more than happy to walk you through the whole process.

You can't escape the surrender charges though. If you're in your first year you may stand to lose about 7%. In the long run you may be better off because putting the money in mutual funds will eliminate the Mortality expense that all variable annuities have.

As a sidenote, if the IRA holder is older (60+) the variable annuity may very well be a prudent investment vehicle. Use some caution though, the idea that variable annuities make poor vehicles for IRAs is a blanket statement and every investment choice should be dictated by the very specific needs/wants of each individual investor.