Life insurance companies design and sell insurance products called annuities. An annuity is a financial product that guarantees a monthly payment to the policyholder for the policyholder's life or for a set period of time. This payment may be deferred until some time in the future when the policyholder wants to receive the money. If it is, the product is called a deferred annuity. When you want to move your money from an annuity into another account, like an IRA, you must withdraw the funds from the annuity, since the IRS does not allow a rollover from an annuity to an IRA.
The significance of rolling your annuity into an IRA is that you are moving your money from a private insurance contract to a government tax shelter. Your IRA investment options may be different from the annuity's investment options. You also will have contribution limits on an IRA that are not present in an annuity.
The process for moving an annuity to an IRA is simple. Call your insurance company and tell them to liquidate your annuity. They will send you the forms necessary to complete the transaction. Once you return the forms, the insurer will send you a check for the balance of your annuity. Deposit the funds into your checking account and then transfer them to a new IRA that you set up with your broker.
The benefit of moving your annuity to an IRA is that you increase the number and variety of investments available to you. For example, annuities primarily invest in one of two investments. You either invest in the insurance company's general account, which pays a fixed interest rate, or you invest in mutual funds. An IRA may invest in other investments like stocks, bonds, precious metals and even annuities.
Before moving your annuity to an IRA, make sure that you won't be paying a penalty. Annuities come with surrender charges. These charges are penalties applied by the insurance company if you liquidate your annuity prior to the maturity date specified in your contract. The maturity date is the length of time your contract must be kept before you can liquidate your annuity or move it to another insurance company or brokerage.
Consider the tax implications of moving your money to an IRA. If you are under age 59 1/2, you will pay a 10 percent penalty on any gains in the annuity. Additionally, you will pay taxes on the gains in your annuity when you liquidate the annuity. This could make the transfer of your funds to an IRA an expensive proposition.
- "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
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