Annuities are insurance policies. These policies guarantee you an income during retirement. But some annuities defer this income. The former are called immediate annuities and the latter are referred to as deferred annuities or savings annuities. Immediate annuities cannot be rolled over. Only deferred annuities may be rolled into a new annuity .
You may roll over your deferred annuity into a new deferred annuity or an immediate annuity. Contact your insurer and request a 1035 exchange. This exchange allows you to move the money directly from one annuity contract to another. Some states place restrictions on your rollover. These restrictions require you to compare your new annuity purchase with the existing annuity. If you are comfortable with the new annuity purchase, then the insurer transfers the annuity. If not, you keep your existing annuity.
The annuity transfer is a direct transfer. There is no tax due on the amount of money you move from one annuity to another. Instead, the transfer is handled by the insurance company, similar to the tax-free transfer made when one IRA is exchanged for another.
You benefit from a rollover annuity when the new annuity offers you something that the old annuity did not and the benefit is an actual benefit. This could be a higher investment return or lower fees or a stronger guarantee (i.e. switching from a variable annuity to a fixed annuity).
Before rolling over your annuity, you should carefully consider the move. New annuities come with new surrender charges. A surrender charge is a penalty for withdrawing money or cashing in the policy before a specific date. These surrender charges often are effective for many years, encouraging you to stay in the annuity for the long term. If you need money short term or you are retired drawing an income, the new surrender charge could become a serious liability.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- IRS: Publication 575