Is an Annuity Rollover Taxable?

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.

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.

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.

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.