How Do I Transfer Annuities?

An annuity is a tax-sheltered investment. Similar to an IRA, your annuity grows tax-deferred until you take out the money. The IRS gives no benefit without a hitch and the hitch is that you pay taxes and penalties on the growth if you're under 59 1/2 when you take out the funds. In order to avoid this, you have to transfer the funds from one annuity to another in a special manner called a 1035 transfer. This allows you to avoid the government tax and penalties, although your original annuity company might charge an early withdrawal penalty.

Use a 1035 transfer when you move your annuity. A 1035 transfer is a tax-free transfer from one insurance company annuity to another. You don't pay taxes or penalties if you transfer the funds this way. In order to do a 1035 transfer, you have to fill out a special paper and check "1035 transfer" on the application.

Check your old annuity contract first to see if you pay a penalty if you cash out the contract early. Every contract has a table of contents where you'll find a section for fees and penalties. The penalties decrease every year you hold the contract. Simply find the date you bought it and count its birthdays. Then go to the number of years on the contract chart to find out how much the penalty is.

Consider a partial 1035 transfer. If you find you'll owe a penalty for early surrender, consider transferring a little at a time. If your old contract offers penalty-free withdrawals, simply transfer the amount you can withdraw without a penalty. Most of the time it's 10 percent, but sometimes that amount is cumulative, meaning it builds to 20 percent if you didn't use it the previous year. Not all companies allow partial 1035 transfers. Check with both the receiving company and your present company. Your new annuity representative or financial adviser can do this for you.

Fill out the annuity paperwork. Make certain the name on your new contract matches the old one exactly. If you hold the old contract with another person in joint ownership, you can't 1035 transfer it into a new contract held only by you. Also, if your name is John K. Dough on the old contract, it should be John K. Dough on the new one, not just John Dough.

Track all the money you put into both contracts. The old annuity company will want their annuity contract back when you surrender it for a transfer. Write down the initial amount you submitted to them and any other deposits you made to the old contract. Some companies don't transfer that information to the new annuity company, so the new company has no idea of the amount you put into the annuity. When you take the funds at retirement, the company may send you a form that shows all the money is growth if you don't have proof otherwise.

 

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