How to Fund an Annuity With Mutual Funds

An annuity is a tax deferred investment product. Variable annuities are similar to mutual funds with guaranteed return riders for security. Indexed annuities offer guaranteed minimum interest and potential for higher growth in a particular index grows. Fixed annuities offer interest similar to a CD. If you want to keep your mutual funds and still get an annuity, have all dividends and interest from your mutual funds sent to a bank account. When you accumulate enough, simply invest them in an annuity. If you just want an annuity, cash out the mutual funds and invest the money into an annuity.

Select the best annuity for your situation. Variable annuities tend to be better for younger people who face the risk of inflation. Inflation is the reduction of buying power for your dollar. In plain terms, it takes more money to buy "stuff" as years pass. If you receive a fixed rate of return such as 3 percent and inflation grows at an average of 3.5 percent, you can't buy as much "stuff" and you're saving so you can buy "stuff" at retirement.

Check the surrender fees on the various annuities, as well as the cost of any guarantees for return when your selection is a variable. You also need to find out the rules of the guarantee, such as length of time you need to leave the funds. Look at the investment returns of the funds inside the annuity, the ability to rebalance the account and other service. If you select an indexed annuity, check for minimum guaranteed interest, what percentage of the index growth you get and any cap on your earnings. If you select a fixed annuity, find out how high the guaranteed interest rate is and how long it lasts.

Estimate how much you'll have to pay in taxes if you have growth in the funds. You'll want to keep that much aside to pay a quarterly estimate if it's high or increase your withholding from your job.

Sell the mutual funds. You can do this three ways. If you have an account to access online, simply sell the funds that way. If you have the funds through a broker contact the broker and have him sell the funds, phone the mutual fund company or send in a form to sell them. You can also ask your new annuity rep to submit a from to transfer the mutual fund cash directly to the annuity. Normally you have to sell the funds first.

Open an annuity with the company you selected. It's a simple process and requires you answer a few questions. Some companies require you put the annuity in a brokerage account. In this case, you'll need a photo ID such as a driver's license even if you know the representative, because of security laws. The rep has to put the license number on the application to prove he saw it.

Consider requesting the check to come to you first. Even though it might seem easier to have the funds go directly to the annuity, it's more difficult to track if they don't receive the check. You also have a better record if you receive the check and then send them money. If you need to pay additional taxes, you also can keep some of the funds for that purpose if you receive the check.


About the Author

Jay P. Whickson worked as an insurance rep, financial planner and stockbroker from 1979 until her retirement in 2007 when she began writing about the field of finance. Whickson has both a Bachelor of Science and a Master of Science in education from Indiana University. She also has post Masters courses in science and a number of different insurance and investment designations and degrees.