Getting
Out of Your Annuity
CBS
Marketwatch
If
you have an annuity-- whether it's variable or fixed or equity-indexed--
and you're thinking of dumping it, carefully consider the consequences
of your decision, because for many of them, there's no easy way out.
There are many reasons why you may want out of your annuity. Perhaps you
have several you want to combine into one, or your financial situation
has changed and you can no longer contribute to your annuity, but certainly
could use some cash. Hopefully, you're not looking to get out because you
bought something you didn't fully understand.
This is what you'll typically lose by cashing out early:
-
A 10 percent penalty on the
taxable portion of your annuity is forfeited to the Internal Revenue Service
if you're under age 59 and 1/2.
-
On "fully loaded" products,
surrender charges no longer apply to withdrawals. No-load or low-load annuities
usually carry smaller surrender charges.
-
An annuity is treated as ordinary
income, so you'll be paying taxes as you would on regular income.
Since annuities enjoy special tax treatment in the eyes of the IRS, it
follows that there would be tax ramifications for cashing out. But not
always. Perhaps you've heard of a "1035 transfer" that facilitates tax-free
transfers. Section 1035 of the tax code allows for the tax-free exchange
between like accounts: annuity to annuity, life insurance policy to life
insurance policy, and life insurance policy to an annuity. However, you
cannot use a 1035 transfer to go from an annuity to a life insurance policy.
If you use an annuity to fund your IRA, which is generally discouraged,
you can transfer to another IRA without a tax penalty. You have 60 days
in which to do this. It's not recommended that you use an annuity to fund
your IRA because the government has already given IRAs the tax-deferred
status for which products like variable annuities are charging you.
Most annuities carry surrender or withdrawal fees. Anyone looking to get
out of an annuity should consider waiting until the surrender charges no
longer apply. If you decide to cash out your annuity no matter what the
penalty, you may be able to deduct the loss on your income taxes. Check
with your tax adviser on that one.
WHAT ARE YOUR ALTERNATIVES
-
The 1035 Exchange: Use
the 1035 exchange to convert to another annuity, but this time consider
one with no load or a lower load than the annuity you now own.
-
Look into Waivers: If
you need cash, get out of your annuity policy and read through the section
on withdrawals or waiver benefits. Some annuity contacts, but not many,
contain waivers that allow you access to some or all of your money in the
event of a disability, nursing home confinement, or terminal illness. A
few insurers might allow you to withdraw up to 10 to 15 percent of your
annuity without penalty under certain circumstances.
-
Change your Fund Allocation:
Variable annuities grow through gains in investment subaccounts. You
choose the distribution of your funds into these accounts. Consider changing
your fund allocation to take advantage of the current market. This will
not trigger a tax liability and has traditionally been a big selling point
of VAs.
-
Slide into an Immediate Annuity:
If you're thinking about early retirement (prior to age 59 1/2), you
might consider rolling your variable annuity into an immediate annuity.
Although there are still expenses associated with immediate annuities,
they do guarantee a lifetime income. And, increasingly, insurance companies
are adding options by making adjustments for inflation to your payouts
and providing easier access to your assets. Of course, these options come
with a price, and it shows up in higher fees.