Can I roll over or transfer a fixed deferred annuity tax free?

Personal Finance December 08, 2013 Print Friendly and PDF

Fixed annuities are similar to bank certificates of deposit (CDs) in that they earn a guaranteed interest rate for a set period of time. Two major differences are that fixed annuities are tax deferred and often provide a higher return than bank CDs. Yes, you can roll over or exchange a fixed annuity for a new annuity. Check to make sure that surrender charges don't apply, however. Typically, a minimum deposit of at least $5,000 will be required. Investment experts strongly recommend that money from one tax-deferred plan be moved intact to another to avoid penalties and future record-keeping hassles (e.g., figuring taxes due on annuity earnings).

When a fixed annuity term ends, investors generally have three options:

  1. "Annuitize" the fixed annuity by having the issuing insurance company convert the account balance into a stream of income that can last for the life of owner (or a joint-and-survivor annuity for the owner and the owner's spouse).
  2. Roll the fixed annuity into another annuity contract using a 1035 exchange. This means that the transfer follows the provisions of IRS tax code section 1035. A financial adviser can assist you with this. By doing a 1035 exchange, you won't have to claim the annuity earnings as income immediately, and you avoid paying taxes at that time (note: annuities are tax-deferred investments, so you will still have to pay taxes upon withdrawal at a later date). With a 1035 exchange, you can exchange a fixed annuity for another fixed annuity or a variable annuity.
  3. Withdraw the fixed annuity balance, including all of its accrued earnings, and pay taxes and/or any applicable penalty for early withdrawal (if you are younger than 59½).

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