Retirement annuities are tax-deferred savings plans. They represent a contract between you and the issuer, usually an insurance company. You may transfer or roll over an annuity in the accumulation phase into one with a different broker without tax consequences, through a 1035 exchange. However, you should be wary of surrender fees and time periods.
Types of Annuities
Retirement annuities are typically fixed or variable. Fixed annuities are typically invested in government securities and high-grade corporate bonds and offer a guaranteed rate of return. Variable annuities let you invest in a portfolio, with choices ranging from very conservative to very aggressive. Annuities are in an accumulation phase when they are still gaining value, before you begin receiving a payout, according to Annuity FYI.
When to Consider a Rollover
You might consider a rollover because of dissatisfaction with your broker, monetary enticements, or access to additional or more lucrative investment charges. If dissatisfaction with your broker causes you to change to a different company, you'll probably have to exchange the annuity for one offered by the current broker. Bonus payments are offered to entice you to transfer, says the Securities and Exchange Commission. For example, a company might offer a 4 percent bonus credit on your annuity that has a cash value of $20,000, meaning your annuity would be worth $20,800 upon transfer. Other enticements could include a higher guaranteed rate of return on your fixed annuity, or wider investment choices for your variable annuity
Because annuities are contracts, they often come with penalties for ending them, particularly if you do so soon after acquiring them. Surrender charges, which apply if you withdraw your money within a certain time, also apply if you transfer from one company to another, according to the SEC. Annuities that offer bonuses for transfer often come with long surrender periods and high surrender charges. Weigh the benefits of a transfer with the potential costs, the SEC recommends.
If you've decided to transfer your retirement annuity and have found a new company for it, do a direct rollover to avoid tax consequences. A "1035 exchange" refers to the U.S. tax code permitting the transfer of value from one annuity contract to another. As long as the new product meets IRS guidelines and is relatively similar to the existing one, you are free to move your money, says Zack's. An indirect rollover occurs if the old annuity company sends the check to you instead of to the new company. If this happens, you have 60 days to forward the money to the new provider. If you don't, you'll pay taxes on it as if it were a distribution.
- Stockbyte/Stockbyte/Getty Images