Is an Annuity Rollover Taxable?

A properly executed annuity rollover will not generate income tax liability.

A properly executed annuity rollover will not generate income tax liability.

Annuities are retirement investment vehicles offered by life insurance companies. Countless annuities exist and new products continue to be developed with enticing and advantageous features. If you are unsatisfied with your current annuity and believe switching to another is in your best interest, a rollover is required to move the money. This decision should only be made after careful evaluation of the immediate and future ramifications of a rollover, and the suitability of both the current and proposed annuity products.

Rollover Basics

A rollover is the transfer of money from one retirement plan to another. The process involves closing, canceling or otherwise terminating your current retirement plan and opening another one, then shifting the money to the new account. Rollovers are also referred to as "1035 exchanges," which is the Internal Revenue Service code for such transactions. If completed properly, an annuity rollover is not a taxable event since the money remains within a designated retirement plan.

Direct Rollover

A direct rollover occurs when money is transferred straight from one retirement plan to another via wire transfer or other means. This method is the most common and results in the fastest completion of the rollover process. Once a new retirement account is opened, the owner provides the original custodian with the new account details and initiates the rollover by submitting the appropriate paperwork. Depending on the insurance company's methods, money is deposited into the new annuity by way of wire transfer or a check mailed to the new custodian.

Indirect Rollover

An indirect rollover occurs when retirement money is transferred to a new account using the annuity owner as an intermediary. After opening the new account and providing the original custodian with its details, that insurance company will initiate the termination of the existing annuity and mail a check for the surrender value to the owner's home address. The check is typically made payable to the new insurance company "for the benefit of" the account owner, but occasionally made payable simply to the owner. IRS regulations stipulate that if the money is not subsequently deposited into the new retirement account within 60 days it is considered a distribution and becomes fully taxable.

Surrender Charges

While a properly executed annuity rollover avoids unnecessary income taxes, it may not alleviate surrender charges imposed by the insurance company. The majority of annuity contracts contain language permitting insurance companies to keep a percentage of your account value if you close your account before a specific number of years have passed. These surrender charges commonly range from 7 percent to 10 percent and decrease by 1 percent annually until finally disappearing entirely. Executing a rollover during this period will result in a reduction of the amount transferred by the surrender charge percentage.


Before initiating an annuity rollover, carefully consider the possible consequences of terminating your original contract and beginning a new one. Opening a new annuity account will likely result in a new surrender period with new surrender charges. Examine the reasons for your decision to change products and investigate other possible alternatives, such as an adjustment to your annuity's investment allocation.


About the Author

Gregory Gambone is senior vice president of a small New Jersey insurance brokerage. His expertise is insurance and employee benefits. He has been writing since 1997. Gambone released his first book, "Financial Planning Basics," in 2007 and continues to work on his next industry publication. He earned a Bachelor of Science in psychology from Fairleigh Dickinson University.

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