There might be situations where it makes sense to roll a variable annuity into an IRA. For instance, your annuity might have high fees, or perhaps you want more control over your investment choices. Or maybe you simply want to consolidate your investments into a single IRA. Whatever the case may be, it is possible to roll over a qualified variable annuity into an IRA. Making a decision on where to roll over your annuity, or even if you should, can be a big financial decision and you may want to consult with a financial advisor before moving forward.
Variable Annuities: Qualified and Non-Qualified
A variable annuity is a type of tax-deferred account that lets you invest your money in the market, potentially growing your money over time during favorable market conditions. That could lead to bigger payouts, which contrasts with fixed annuities; these accounts pay a fixed amount each year, regardless of market conditions.
Qualified variable annuities are those that are funded with pre-tax dollars. If you want to transfer or roll over a variable annuity into a traditional IRA, the annuity must be qualified. Retirement plans such as traditional 401(k) and 403(b) are funded with pre-tax dollars and are thus qualified retirement plans.
If an annuity is non-qualified or funded with after-tax dollars, you can’t transfer or roll over to a traditional IRA. Non-qualified refers to any type of retirement plan funded with after-tax dollars, such as a Roth 401(k), Roth 403(b) or a Roth IRA. However, you may have the option for a rollover into other types of non-qualified accounts. For instance, you can roll money in a Roth 401(k) into a Roth IRA.
Can You Roll Over a Variable Annuity Into an IRA?
If you have a qualified variable annuity you want to roll over to an IRA, it’s possible to do so under the right set of circumstances. So the basic answer to the question is “yes” but you must be aware of how to do it correctly and if your circumstance qualifies.
For example, your qualified annuity can be rolled into a traditional IRA, but not directly into a Roth IRA. It’s also possible to request a 1035 exchange, where you combine money from the same type of account, such as two traditional IRAs. Let’s take a closer look at how to roll a variable annuity into an IRA correctly and how you start the process.
Rolling a Variable Annuity Into an IRA
A rollover is typically necessary if you want to move money from a different type of qualified account, such as a 401(k) or 403(b), into an IRA. If your annuity is currently held in one of these qualified accounts, it must be rolled into a traditional IRA. This is just as true for a variable annuity, even if it isn’t the same type of investment as each of these unique retirement accounts.
While it may be possible to roll it into a Roth IRA, you can only do that if you first roll it into a traditional IRA and then perform a Roth conversion. That conversion will result in owing income taxes on the converted amount, however. This is because Roth accounts are funded with after-tax dollars, and you won’t have paid income tax yet on money held in a traditional retirement account.
In addition to a transfer, you can also transfer your money if you are rolling your variable annuity into another type of qualified annuity. This type of transfer is known as a 1035 exchange and doesn’t result in income taxes. However, the money must stay in a qualified account to avoid a taxable event.
To start the process of rolling a variable annuity into an IRA you can begin a transfer, which is the simplest way to get the job done. All you have to do is notify both of the companies involved, the one holding your IRA and the one holding your annuity. From there, you just have to fill out the necessary paperwork with both institutions and then your transfer can be finalized. You can also work with an expert, such as a financial advisor, who can walk you through the whole process.
Watch Out for Excess Contributions
Sometimes IRA rollovers can result in excess contributions. For instance, if you move money from a non-qualified annuity into your IRA, the rollover is treated as a contribution, even though you are just moving money around. Because the rollover is treated as a contribution, in this case, it raises the amount you have contributed for the tax year.
If you end up over the contribution limit for your IRA, you could be hit with a hefty tax bill. There is a 6% penalty on excess contributions, and that penalty will be charged again in the next year if the issue isn’t corrected. You can rectify the issue by withdrawing your excess contributions (and earnings), but there may be an early withdrawal penalty if you are younger than 59 ½.
You can roll over your variable annuity into a traditional IRA pretty easily if you decide it’s the right thing for your long-term goals. If you roll a qualified variable annuity into an IRA, watch out for excess contributions. That normally happens if you move money from non-qualified sources, but it can result in a big tax bill. Hence, one should use caution when performing this type of rollover.
Tips on Annuities
- Deciding whether to roll over an annuity into an IRA can be a complex calculation. That’s where the expertise and guidance of a financial advisor is so valuable. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Variable annuities depend on the market to do well for the best possible payout. While no one knows for sure how the market will do in the future, SmartAsset’s investment calculator can help you estimate the future value of your annuity. Use different rates of return to see different possible scenarios.
- You should also have some idea of how much money you will have in retirement. Again, there will be some degree of uncertainty if you invest in variable annuities. However, SmartAsset’s retirement calculator can help you estimate what your retirement income will look like.
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