You can roll qualified variable annuities – those established with pre-tax dollars – over into a traditional IRA. Qualified annuities are often set up by employers on behalf of their employees as part of a retirement plan. Non-qualified variable annuities – those established with after-tax dollars – are not eligible for a rollover to a traditional IRA, but you can move them into other types of non-qualified accounts.
Characteristics of Variable Annuities
A variable annuity is an investment vehicle combined with life insurance benefits. These products are popular in retirement planning because they offer tax-deferred growth and certain guarantees on principal, a future income stream and a death benefit for heirs.
Like other investment products, a variable annuity can be held in either a taxable account or in a tax-advantaged qualified retirement plan. The funds within the variable annuity can be allocated across sub-accounts, which are similar to mutual funds, for participation in the stock market or bond market. Combined with the unique benefit of guaranteed income, annuity contracts are useful as a pension replacement or as a supplement for many savers.
Rolling Over an Annuity to an IRA
Several employer retirement plans come in the form of a variable annuity contract, such as 457 or 403(b) plans, especially in the public sector. When people change jobs, they can still roll over one of these tax-sheltered annuities to a traditional IRA tax-free. As of Jan. 1, 2008, funds from these plans can also be converted to a Roth IRA, though taxes will be due on the amount converted.
Variable annuities purchased outside of the workplace can also be rolled over to another qualified annuity via a 1035 exchange. This is a non-taxable transfer often used to gain access to a new annuity contract with different investment options, better riders or lower expenses. As long as the funds remain in qualified status, no taxes are incurred.