How to Roll Over an Insurance Annuity

No matter what type of annuity you have, there are newer ones each year with more bells and whistles. Maybe you originally bought a fixed annuity that gave you interest and now you want a variable annuity with the many different investment options. If you want to transfer your money from one insurance annuity to another, you must make certain you follow specific steps or you'll end up paying tax and penalties. Since annuities are retirement vehicles and the growth is tax sheltered, you have to be careful to avoid penalties if you move money before the age of 59 1/2.

Check for surrender fees from the insurance company. Each policy has a surrender period, and the company charges you a percentage of the balance if you move funds before the period ends. If your contract is only a year or two old, chances are you'll face a high penalty to roll it into a different annuity. Evaluate the cost first to see if a later rollover might be better.

Consider using a 1035 transfer. When you roll one annuity to another, a 1035 transfer rolls the funds directly from one insurance annuity to another. By doing this, you avoid taking constructive receipt of the funds. This just means you don't receive them in any manner and the money goes directly into a similar product. There's no tax on the growth and no federal penalties for early withdrawal.

Select the best annuity for your situation. Normally, if you have no other assets for retirement, a variable annuity tends to be the best for younger people. The various portfolios, such as stocks, tend to keep pace with inflation because they increase during high economic activity just as inflation does. Fixed returns don't, and by the time you retire, you tend to lose buying power even though you made money. If you want safety, check for variable annuities with guarantees but read all the fine print.

Fill out the paperwork for the new annuity. You make out the transfer papers when you purchase the next annuity. If you're rolling your funds into an existing annuity, your agent makes out the 1035 transfer form or you might be able to find one online from the receiving company at their website. The form states that you're transferring all assets from the old policy directly to the new annuity. Make certain the name on both of the policies match or the transfer isn't valid. If one annuity has joint ownership, they both have joint ownership or the transfer can't take place.

Keep the paperwork of your old annuity and a log showing the initial amount you put into the first annuity with the new annuity policy. If you cash out the policy or die and your beneficiaries receive the assets, the new insurance company may not have records of the money you put into the policy--known as your basis--and show everything as taxable gain. You need to have proof of deposits made into the annuity or you'll pay a lot more tax than necessary. It's better to be safe than sorry.

Items you will need

  • 1035 transfer form

Warning

  • If you're surrendering an old variable policy and expect to have surrender fees for a fixed policy or new variable policy, weigh your decision carefully. If you want safety, simply move your money in the variable into a fixed account and you'll incur no fees but in effect have a fixed annuity. If you are disappointed with investment returns, you may only need to readjust how you invested your money to receive a better return. Also consider a partial 1035 transfer using only the available "free out" money--the amount you can take each year without a penalty--in the old annuity and move a little at a time if you face surrender fees.
 

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