How Do I Turn a Mutual Fund Into an Annuity?

Annuities are tax-deferred retirement investments. Some contain sub-accounts similar to mutual funds and may even have the same name. These are variable annuities. Fixed annuities offer interest and are much like CDs with tax shelters. Since the fixed annuity doesn't fluctuate in price, in a way it's like having a guarantee. Variable annuities offer guarantees you can purchase so you don't lose money or so that you receive a specified rate of return. People who own mutual funds and find the tax-deferred growth appealing or the guarantees offered on an annuity often want to switch their funds.

Calculate any fees for selling your funds. While most brokers sell A shares, in which you pay the fees up-front, there are still B and C share funds with deferred fees. If you own a B or C share fund, you'll pay a fee if you've not held it long enough. You can find out what type of shares you own by checking your statement.

See if you've made or lost money. If you've made money, no matter whether you invest it or not, you'll pay taxes on the growth when you sell it. If you've lost money on your funds, you can deduct the loss from any gains that year. If you've held the funds longer than a year, it's a long-term capital gain taxed at a lower rate. Selling funds held less than a year triggers short-term capital gains. You can only deduct long-term losses from long-term gains and short-term losses from short-term gains.

Sell the funds and request a check. Call your broker to sell the funds, sell them online if your account is online or call the fund company to sell them. Once you receive a check, deposit it into your checking account. It's easier to track your own check if something goes awry when you invest in your new annuity than it is to track a mutual fund check, and you have a record in your check register of the amount you invested. You also might want to retain some funds if you have to pay taxes.

Find the right annuity for your situation. While a fixed annuity's safety is attractive, the younger you are, the more you need stocks in your account to keep pace with inflation -- the increase in prices on goods and services. Stocks increase in price as inflation grows. Inflation erodes your buying power if your investment receives a lower return than the price increases. Variable annuities offer the opportunity to increase your return but also have guarantees for minimum returns.

Fill out the paperwork and open an account. All you need to do is write a check to the insurance company for the new annuity and it's a "done deal." Make the selection carefully, and note the surrender fees and costs of the contract. Also check the company's financial stability and any customer complaints by going to your state's Department of Insurance website.


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.