Why Even Consider an Annuity Rollover?
Many people have annuity contracts that date to pre-Ronald Reagan. Because of the potential tax hit, they’re afraid to move their money. As a result, they avoid looking for a better option. Even though a move might be advantageous.
If you are in this boat, there is good news for you. If you have an old annuity or an old insurance policy with cash value in it, you can transfer your cash to a new annuity contract or life insurance. Under the rules of a section 1035 exchange.*
What is a 1035 Exchange? It’s the Legal Term for an “Annuity Rollover”
A 1035 exchange is a rule that permits tax free transfers of “like assets” under the tax code. Like asset in this case means insurance product to insurance product. Specifically under 1035:
- Annuities can be exchanged into annuities.
- And cash value from a life insurance contract can be exchanged into a new annuity or life insurance.
- A Glaring exception: you can’t exchange annuities into life insurance.
Why is this good?
You may have built up significant cash in an old policy (which is good) but that policy lacks some of the newer features and benefits that new annuities or life insurance offer. Some examples of improvements could be:
- Your current annuity company’s payout ratio for conversion to an immediate annuity income stream is not as generous as another company. Solution: 1035 exchange (“annuity rollover”)
to the new company and establish an immediate annuity
- Your current fixed annuity earns a simple interest rate but you like the idea of a newer policy with a guaranteed* income rider and the ability to invest in stocks. Solution: exchange that fixed for a variable annuity with these benefits.
- You have a $25,000 life insurance policy with $25,000 of cash value. Your goals have changed and you want to invest the money more aggressively. Solution: exchange the life insurance for a variable annuity (be careful here of losing some unique tax benefits to the life insurance policy).
- You have significant cash in a life insurance policy, but there it does not have a no-lapse guarantee (no-lapse guarantees can be vitally important under some planning strategies). After proper analysis and comparison, you find another company that will offer a no-lapse guarantee and the transfer economics work. Solution: exchange the cash value to a new life insurance policy.
- And my favorite – you have a high fee variable annuity and would prefer a lower fee variable annuity. Some traditional variable annuity fees are as much as SEVEN TIMES higher than fees on some of the newer low cost variable annuities!
Don’t take the Narrow View
There are many options to consider here of course. However, the important thing is not to look
at your life insurance or annuity in a tunnel. A comprehensive analysis of your insurance products is required. Only then you can determine the best course of action to provide retirement security and develop your own plan for a secure income stream in retirement. It is also important that you make sure you don’t make any of the mistakes often involved with poorly executed exchanges. Mistakes that cause an unintended taxable event (i.e. blowing up the whole deal and owing a boatload of taxes).
Don’t Know What to Do or Have the First Clue About Annuities?
Not sure what you should do? You’re not alone. Annuities are one of the most confusing products in the financial world.
If you have a question that you think I could answer, contact me at my contact page HERE. Or if you’d like to do more research on annuities, I prepared a much more thorough analysis of annuities in a report that you can request here: Click HERE to get your copy. I think you’ll find it helpful.
FYI: This is a good “rollover!”
If you have a foreign annuity, check out the video I made discussing this topic: Foreign Annuities – Bringin’ em Back
*Certain protocols must be followed when enacting a 1035 exchange (“annuity rollover”). Furthermore, the IRS can be very strict about this. Example IRS Bulletin – consult an advisor before attempting a 1035 exchange.
Guarantees offered by insurance companies are based on the claims-paying ability of the insurers. They are not government or FDIC guaranteed in any way.
See our disclaimer HERE.
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