What is an annuity? It’s a transfer of risk contract. Life insurance companies issue annuity contracts, and the type of annuity you own will dictate what it contractually solves for. Some solve for lifetime income. Some solve for principal protection. Not all annuities are the same.
With carriers introducing new annuity products every day, you might be pitched by a salesman to transfer your old annuity to their “favorite” annuity. Before you sign that transfer paperwork, you need to know specific details to ensure that you are making an informed decision.
Annuitized = Locked In
Not all annuity types are transferable. For example, annuities that have been “annuitized” (i.e. payments created) can not be transferred at all. Some people call them an income annuity or retirement income annuity. The best way to describe “annuitization” is that it’s like ripping the knob off of a water faucet. Once that knob is gone, the water is going to flow. Once you have “annuitized,” the income stream is going to flow.
The types of annuities that are not transferable are Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs). These are all “annuitized” strategies.
Can Doesn’t Mean Should
When I receive questions like “Can I transfer my retirement annuity?” or “Can I transfer an annuity from one company to another?”, that usually means someone has recommended that they initiate a transfer.
On the surface, transferring from one annuity to another makes sense. It’s a tax free event. No income taxes are triggered. It’s an institution to institution transfer.
So do you “pay tax” on an annuity transfer? The answer is no.
But just because you can transfer an annuity to another annuity doesn’t mean you should. The only way it ever makes sense is if the transfer is mathematically in your favor or your specific goals have changed.
If you own an annuity inside of a Traditional IRA, the transfer is from one IRA to another IRA (established at the receiving annuity company). From one retirement account IRA to another retirement account IRA. It’s a non-taxable event.
Even though any money coming out of an IRA will be taxed at ordinary income levels, transferring an annuity from one IRA to another will NOT trigger any taxes at all because no money is being taken out of the policy.
I recently received a question that asked, “Can a fixed annuity be rolled into an IRA?” The answer is if that fixed annuity is also inside of an IRA, then it can be transferred to another annuity inside of an IRA. It has to be an IRA to IRA transfer.
So it’s important to understand that you can’t transfer a non-qualified (non-IRA) annuity to an annuity inside of an IRA...or vice versa.
When you want to transfer a non-IRA annuity (aka: non qualified annuity) to another non-IRA annuity, this is a non-taxable event called a 1035 exchange.
The number 1035 refers to the actual IRS Code number that explains this type of annuity to annuity transfer. By the way, 1031 refers to real estate transfers and 1035 refers to life insurance and annuity transfers.
Riders Can’t Ride
Tax deferred annuities like Variable Annuities (VAs) or Fixed Index Annuities (FIAs) can be purchased with attached benefit riders to the policy. Most of these riders are for future lifetime income needs. When you attach a rider to a policy, that rider valuation is a separate calculation from the accumulation value.
Whether it’s an IRA or non-IRA transfer, Income Rider valuations do not transfer to the new annuity. Only the accumulation value of the policy is transferable.
In my opinion, you should never use an upfront bonus on a new annuity product to justify transferring from your current annuity. If an agent or advisor is making this recommendation to justify taking surrender charges or having you pay a surrender penalty (aka: early withdrawal penalty), you need to find a new professional.
There are no philanthropists running annuity companies, and no one is giving away free money. Upfront bonuses are just part of the overall contractual guarantees of the policy. They are nothing special and should never be the reason you decide to transfer your annuity.
Side By Side Truth
The industry takes annuity transfers seriously. They do not want agents to be “twisting,” “churning,” or “flipping” from one annuity to another just to create new commission payments.
During the application process to transfer from one annuity to another, part of that required paperwork is a side by side comparison of both old and new annuities. Every contractual detail of these 2 annuity contracts from the death benefit to income benefit….and every other contractual guarantee included are examined to make sure that mathematically the annuity you are going to is better than the one you are transferring from.
When making the decision to transfer from one annuity to another, it has to be better for you…not the person selling it to you. It's really that basic.