Can I Deduct Losses From Rolling a Qualified Annuity Into Another Qualified Plan?

by Jeff Franco, studioD

If you have a qualified annuity investment is a loss position when rolling it into another qualified plan, the IRS will not allow you to claim a deduction for any of the loss. But if you adhere to the IRS annuity rollover rules, you can avoid paying early withdrawal penalties. Should you decide not to immediately rollover the annuity, only then is it possible to claim a deduction for the loss.

Qualified Annuity Rollovers

To be eligible to rollover the value of your current annuity into a different qualified plan or IRA, your current annuity must be a qualified retirement plan. This includes employer stock bonus and profit-sharing plans, annuities provided by your employer, 401(k) and 403(b) plans, and deferred compensation plans that are only available state or local government employees.

Liquidating the Annuity

If you are not already receiving annual payments from the annuity plan, such as periodic payments, you can cash out your annuity and roll it into an alternative qualified retirement plan. You can do this without being subject to an early withdrawal penalty.

Rolling Over Funds

When you liquidate an annuity account, you have two options on how to implement your rollover. The first option is to have the institution that manages your annuity send the distribution directly to you. The second is to provide them with instructions to directly transfer the funds to another qualified plan. However, If you choose to receive the funds directly, the IRS requires the financial institution to withhold 20 percent of the funds for income tax. Because direct rollovers aren’t subject to withholding, it can beneficial to choose the new qualified plan prior to liquidating the annuity and providing the institution with rollover instructions. You must complete the rollover within 60 days of liquidating the annuity in order for the rollover to remain tax free.

Claiming a Deduction

You can also cash out your annuity, report the losses on your tax return, and invest the proceeds in a qualified plan at a later date. The IRS is clear on the fact that the loss is an ordinary loss rather than a capital loss. You calculate the loss as your total investment in the annuity contract, minus the proceeds you receive. Deduct it as a miscellaneous expense that is subject to the 2 percent adjusted gross income limitation on Schedule A.

About the Author

Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.

Photo Credits

  • Comstock/Comstock/Getty Images