can i roll an annuity into an ira
Can i roll an annuity into an ira
I have reached retirement age and have a variable annuity with Hartford. I would like to get out of the annuity and roll over into a bank account IRA. I have held the product for 12 years and there is no penalty for withdrawal. Can I do this?
There isn't a general reason why you should not be able to do this, but it is hard to answer without knowing the specifics of your variable annuity. I would start by calling Hartford and asking them how to go about rolling your money to a different IRA and what fees would be assessed.
The extent that you would have problems would depend on if the annuity is considered Qualified or Non-Qualified. If the annuity is qualified that means that the money that was put into it has never been taxed and a rollover to an IRA is simple.
The possible issues here are tax issues and a CPA is likely the best person to answer this question.
Two other things to consider in such an event is the loss of any 'living benefit' or 'death benefit'. Variable annuities have been through quite the evolution in the last 15 years. Death benefits have been around longer than living benefits but both are usually based on some derrivitive of a 'high water' mark of the variable sub accounts. You might want to ask Hartford the question ". how will my living or death benefits be affected if I roll this over".
Can I roll my non-qualified variable annuity into a tradional IRA?
I have a variable annuity that I invested $80,000 into 10 years ago. Performance has been horrible and I'm down to $72,000. I am 38 and want to put into a traditional IRA. Are there tax consequences because I have lost money?
I'm not sure why you want to put this into a traditional IRA. Variable annuities are already tax-deferred so you're not gaining any tax advantage there.
Depending on your tax situation you could claim a loss if you sell.
Beware of surrender charges also
Many annuities will impose a surrender charge if the annuity is cashed in before a specific period of time. That period may run anywhere from 1 to 12 years. A typical surrender charge is one that starts at 7% in the first year of the contract, and declines by 1% per year thereafter until it reaches zero. The charge is made against the value of the investment when the annuity is surrendered, and its purpose (other than simply to make money for the insurance company) is to discourage a short-term investment by the purchaser. For that reason, an annuity should always be considered a long-term investment. In the typical fixed annuity, though, this charge will not apply provided no more than 10% of the investment is withdrawn per year.
If you've held it for 10 years as you claim, you may not owe any or much in surrender charges, but you definitely want to know what the situation is before you make a move.
Can i roll an annuity into an ira
December 3, 2004: 11:17 AM EST
By Walter Updegrave, CNN/Money contributing columnist
NEW YORK (CNN/Money) - I rolled over my IRA from a variable to a fixed annuity because I wanted my money to be safer. Is a fixed annuity safer than a variable?
-- Victor Seader, Las Vegas, Nevada
I'm happy to answer your question about fixed vs. variable annuities. But I then want to ask you a question that I think is even more important than the safety issue you're raising.
Let me start by explaining the difference between a fixed annuity and a variable annuity.
A fixed annuity is a contract offered by an insurance company that is much like a bank CD. You deposit a certain amount of money and the insurer agrees to pay a certain interest rate over a specified period of time.
But there are a couple of twists that make a fixed annuity slightly different. On the plus side, unlike with a bank CD, the interest you earn in a fixed annuity isn't taxed until you withdraw the money from the annuity. If you withdraw those fixed-annuity interest earnings before age 59 1/2, however, you'll not only pay income tax, but a 10 percent penalty.
In addition, insurers typically charge an early withdrawal penalty for withdrawals made within the first seven to 10 years that you own the annuity. These early withdrawal penalties can start as high as 10 percent or so (even higher in some cases) and then usually decline by a percentage point or so until they disappear after seven to 10 years.
A variable annuity, by contrast, works more like a mutual fund. You invest in one or more "subaccounts," which can own stocks or bonds or a combination of stocks and bonds.
Often, these variable annuity subaccounts are modeled after or even go by the same name as retail mutual funds. There are some important differences, though, between a mutual fund and a variable annuity. For one thing, a variable annuity has an extra set of fees -- usually known as insurance costs or M&E (mortality and expense) charges -- that given them higher annual operating expenses than mutual funds. Frequently, the combination of the investment management fees to run the underlying investment portfolio plus the insurance charges drive a variable annuity's annual costs above 2 percent a year.
Another important difference is in the way variable annuities' gains are taxed. As with a fixed annuity, any earnings remain untaxed as long as they remain in the variable annuity.
Upon withdrawal, however, the earnings are taxed as ordinary income. You'll pay a 10 percent penalty if you withdraw earnings before age 59 1/2.
But there's a twist. Even if the earnings in your variable annuity are the result of long-term capital gains, those earnings will still be taxed at ordinary income rates (which can run as high as 35 percent) rather than at long-term capital gains rates (which can not exceed 15 percent), as is the case in a mutual fund.
So variable annuities effectively convert long-term capital gains to ordinary income, which is a distinct disadvantage because it boosts the share of your gains that go to Uncle Sam. As with fixed annuities, insurers also charge early withdrawal penalties if you pull out money within the first seven to 10 years or so.
As far as safety, then, the difference between investing in a fixed annuity vs. a variable is rather like the difference between investing in a bank CD vs. a mutual fund.
A fixed annuity provides more security of principal than a variable annuity, but has limited upside potential. When you invest in a variable annuity, you accept more short-term volatility in that the value of your investment will fluctuate with the stock and bond markets. But you have a shot at higher returns. So it's the old risk vs. return tradeoff.
The more important question, though, why are you investing IRA money in an annuity in the first place? After all, the IRA already shelters your earnings from taxes. And it does so without you having to pay the additional layer of fees that annuities charge.
So I contend you're better off keeping your money in a bank CD or mutual fund within the IRA and getting the tax-deferral benefit at a lower price.
In fact, I can think of only one good reason why you might want to own an annuity within your IRA. And that reason is that you want to use some portion of your IRA funds to create an income you won't outlive.
You would do that by buying a "payout" or "immediate" annuity, essentially an investment that converts a lump sum of cash into a stream of income guaranteed to last as long as you live or, if you wish, as long as either you or your spouse or some other person you designate is alive. But, in my opinion at least, it makes little sense to do this until you're actually retired or on the verge of doing so.
Think carefully about the fees
Unfortunately, there are many sales people out there who are only too eager to take IRA money that sits in CDs and mutual funds and roll it into annuities.
Can You Roll Over an IRA Into a Non-Taxable Annuity?
by David Rodeck
The IRS allows tax-free IRA rollovers into qualified annuities.
If you want to roll over your individual retirement account into a non-taxable annuity, you're in luck. The IRS allows this sort of rollover and does not charge any taxes or penalties on the transfer. When handling your rollover, be sure to move your IRA into a qualified annuity or the IRS will consider your transfer a taxable withdrawal.
A rollover is a transfer from one retirement account to another. This is a way to take advantage of the benefits of another retirement plan. The IRS does not want to prevent people from saving for retirement so it does not penalize these transfers. Done properly, a retirement plan rollover should not create any extra tax liabilities. Since IRAs and annuities are both considered retirement plans, you are allowed to roll over your IRA into a non-taxable annuity.
All annuities offer non-taxable growth. You do not owe taxes on your annuity gains until you start taking withdrawals from your account. There are two types of annuities: qualified and non-qualified. Qualified annuities are funded with before-tax dollars, money from retirement plans. Non-qualified annuities are funded with after-tax dollars. When you roll over your IRA, you should select a qualified annuity to avoid taxation on your IRA.
If you move your IRA into a non-qualified annuity, you will run into problems. The IRS treats this transfer as a total withdrawal from your IRA. You would need to pay income tax on your entire account balance. If you are under 59 1/2, you also need to pay an extra 10 percent penalty on your withdrawal.
There are two main reasons for rolling over an IRA into an annuity. If you move your IRA into a fixed annuity, you guarantee a fixed rate of return. The annuity company agrees to pay you a certain return on your money no matter what happens in the stock market. An annuity also can guarantee you life income. If you move your IRA into a life annuity, your annuity will give you monthly payments for the rest of your life. This rollover guarantees that you will never outlive your retirement income.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.
Can I Roll Over a Matured Annuity to an IRA?
Though you might be using an annuity to save for retirement, an annuity by itself isn't a qualified retirement plan for tax purposes. That means that unless the matured annuity is currently held in another qualified plan, you can't roll over the proceeds to an individual retirement account as you could the proceeds of another retirement plan, like a 401(k) or 403(b).
If you're holding the annuity in another qualified plan, such as a 401(k), 403(b) or even another IRA, you're allowed to roll it over into an IRA without any taxes or penalties. The money continues to grow tax-free in the IRA until you eventually take distributions. When you do the rollover, you can either take a distribution and redeposit the money within 60 days into the IRA or you can do a transfer, where the money is paid directly into the IRA.
Other annuities don't count as qualified retirement plans, so you're not allowed to roll the money into the IRA. Rollovers can only take place between two qualified retirement plans. However, you might be able to use the money from the annuity payouts to make an annual IRA contribution.
Having income from a matured annuity won't count as compensation for the purposes of contributing to an IRA. To be eligible to make an annual contribution, you must have income from working -- like wages, bonuses or self-employment income -- or taxable alimony. But, once you're eligible, the IRS doesn't care whether the specific dollars you're contributing come from annuity payouts or paychecks. As of 2013, you can put in up to $5,500 if you're under 50 or $6,500 if you're 50 or older.
If your contributions to your IRA exceed your annual contribution limit, such as if you try to roll over the entire amount of your matured annuity on top of making your regular contribution, the IRS hits you with a 6 percent penalty on the excess. And, the penalty keeps hitting every year that you go without correcting the excess. However, you can avoid the excess contributions penalty if you withdraw the contributions over your annual limit, plus any earnings, before your tax filing deadline. But, your earnings are taxable and are hit with the 10 percent early withdrawal penalty.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."