How do I transfer my variable annuity to a mutual fund without a big tax penalty?

I have $200,000 in a variable annuity series and would like to put it into a mutual fund. How do I do this without incurring a big tax penalty? The annuity will be mature in a couple of months. Are there transfer options?

Annuities, Mutual Funds, Taxes
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January 2018

This is a good question and one you want to make sure you take care of properly so there are no suprises after the fact.

The first question I would have is, what do you mean by mature?  My assumtion would be, you are referring to the fact that the annuity will no longer be subject to surrender charges going forward.  I am going to use that as my basis for answering the question.  Assuming that the contract is out of surrender, you should not incur any penalty or charge for removing the monies in the contract from the insurance company.

The next item that would need to be looked at is whether it was a qualified (an IRA or other type of retirement account) or a non-qualified (non retirement account) annuity contract.  This will make a vast difference in whether or not taxes will be owed. 

Taxes can be avoided if it is a qualified contract by rolling over the assets to an IRA with another provider.  Ideally you would want to perform a trustee to trustee transfer, but if you did a direct rollover with 60 days that woukld work too.  Just be aware you would not be able to do another in the next 12 months. 

Now, if it is a non-qualified annuity we have a different situation.  Should you want to move your funds from the annuity to a mutual fund, this would require you paying tax on the withdrawal.  Essentially, you would pay ordinary income tax on the difference between your cost basis (the contributions you made to the annuity) and the account value upon the withdrawal.  For example, if the value today is $200k and your cost basis is $50k then you would have $150k in additional income the year you make the withdrawal.  You would also be subject to an additional 10% tax if you are under 59 1/2 years of age.

There is one way to avoid the tax, you could do a 1035 exchange from your current annuity provider to a new annuity provider.  This would allow you to continue to defer the current tax and not incur the taxes today.  I am not sure this really solves your issue because ultimately you would still own an annuity.  Depending on what your issues with the annuity are, you may be able to find a provider that has the options you want to invest and allow you to continue to defer the taxes and not pay today.

I would highly suggest that you find yourself a fiduciary advisor to review your current contract, your goals and objectives and see what the best options would be for you.  Thanks for the great question and best of luck!

January 2018
January 2018
January 2018
January 2018