A variable annuity is a contract between an insurance company and the person taking out the annuity, called the annuitant. The value of a variable annuity varies depending upon the investment options chosen within the annuity, hence the name "variable." If you would like to cash in a variable annuity that you own, it's prudent to understand what you can roll that annuity into if you should ever decide to do so.
1035 Exchange Form
The owner of a variable annuity can roll it into another annuity. To accomplish this, the annuitant must complete certain paperwork by filling out a form known as a 1035 Exchange Form. The purpose of this form is to direct the insurance company or guarantor of the annuity to transfer the funds from the current annuity to a new annuity with the current insurance company or with a different insurance company. Annuitants are not required to open the new annuity with the same insurer. The rollover is tax-free since the annuity funds pass directly from one company to another. The owner and insured on the previous variable annuity must be the same on the new annuity.
Qualified Annuity Rollovers
Qualified annuities -- such as annuities in an employer-sponsored 401(b) plan -- can be rolled over tax-free and without penalty into a traditional IRA. They can also be rolled into a Roth IRA, but income taxes on a Roth rollover will likely be due on the entire amount of the rollover in the year in which the rollover is made. Non-qualified annuities -- those that are not held within an employer-sponsored retirement plan -- cannot be rolled into an IRA.
The owner of a variable annuity may want to seek better terms for the funds held in the current annuity. Rolling the annuity into a new one permits the annuitant to take advantage of benefits that are more favorable at that point in time, as opposed to what might have been important at the time the original annuity was purchased. An example of this involves death benefits, which are part of a variable annuity and are paid out to beneficiaries upon the annuitant's death. The value of this benefit fluctuates in a variable annuity based upon market conditions. An investor may want to include a rider, or addendum, on the new annuity, called a Guaranteed Minimum Death Benefit (GMDB), to guarantee that the beneficiary will receive a set minimum benefit regardless of the fluctuation within the annuity.
Variable annuities can be risky. The owner of a variable annuity can decide to roll that annuity into an entirely different type of annuity. Because the value of the underlying investment can fluctuate, the annuitant may prefer to roll it into a fixed annuity. With a fixed annuity, the insurance company commits to pay the annuitant a set rate of interest over the life of the annuity and to make periodic payments of a specific amount to the annuitant, which eliminates the volatility found in variable annuity products.
A good time to roll a variable annuity into another annuity is after it has reached maturation. Each annuity contract comes with a surrender period. The annuitant is required to wait this length of time before cashing in or rolling over an annuity. If the annuitant rolls over the annuity during the surrender period, the insurance company often imposes a surrender charge. This fee is expressed as a percentage of the amount withdrawn or rolled over. Keep in mind that a new annuity will come with a new surrender period and maturity date as well.
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