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.