Annuity transfer rules: A complete guide

Your financial needs, priorities and goals are constantly evolving throughout your life. So when you have a long-term investment, such as an annuity, it's a good idea to revisit it periodically to make sure it's still meeting your expectations. Many financial products are designed to change, roll over, mature and otherwise evolve with you, and you may find yourself wondering how to transfer an annuity.

Read on to learn about annuity transfer rules as well as what to consider before making an annuity-to-annuity transfer.

An annuity transfer happens when you exchange an existing annuity contract for a new annuity contract either with the same company or another one. You might transfer contracts when you're seeking better features, improved investment options or more favorable terms.

No. Whether or not your annuity can be exchanged or moved depends on whether it's paying out or not and how it was funded.

Qualified and nonqualified annuities are transferrable.

Annuities held within an IRA or employer retirement plan are referred to as qualified annuities. These annuities are purchased with pretax dollars and are often used for retirement savings. You generally can transfer a qualified annuity to another qualified retirement account or annuity.

Annuities held outside an IRA or employer retirement plan are referred to as nonqualified. They are transferrable as long as they haven't been annuitized and they're not paying out income yet. They can be transferred to another nonqualified annuity through a 1035 exchange regardless of whether they're fixed, variable or indexed.

These annuities already are paying out income. They generally can't be transferred to another annuity.

The term "annuity transfer" is sometimes used interchangeably with a "1035 exchange." It's named after the tax code, IRS Section 1035, which refers to a tax-free exchange of one nonqualified annuity for another nonqualified annuity. A custodian-to-custodian transfer refers to exchanging one qualified annuity for another qualified annuity.

Transferring an annuity may make sense in various situations, depending on your evolving financial goals, circumstances and the annuity contract's terms. Some reasons to transfer an annuity include better investment options, higher interest rates, lower fees or other features.

• Better investment options. If you have a qualified annuity with limited investment choices, or you're not satisfied with the investments' performance within the annuity, you may want to transfer to an annuity or retirement account with more diversified and appealing investment options.

• Better interest rates. If current interest rates are higher than the rate of return on your fixed or fixed-indexed annuity, you might consider transferring to an annuity with better interest rate potential.

• Lower fees and expenses. If your current annuity has high fees or other costs that are eroding your returns, transferring to an annuity with lower fees can help you retain more of your money.

• Improved features. Some annuity contracts offer enhanced features that may become available through a transfer. For example, you might find an annuity with more favorable living or death benefits.

• Consolidation. If you have multiple annuity contracts or retirement accounts and want to simplify your financial affairs, consolidating them into a single account or annuity can make it easier to manage your investments.

• Legacy and estate planning purposes. Transferring an annuity can be a strategic move for legacy planning purposes. You might consider transferring the annuity to a trust, a beneficiary or a spouse to optimize estate tax strategies.

• You need an income stream sooner. If you own a deferred annuity and your financial priorities shift from accumulating wealth to generating income, you might transfer the funds to an immediate annuity to start receiving regular payments.

Transferring an annuity isn't always a good decision. It may not make sense to transfer an annuity if:

• You'll face surrender charges and penalties for early withdrawals or transfers.
• You'll lose favorable interest rates or income benefits.
• You'll face steep tax consequences, such as going from a traditional IRA annuity to a Roth IRA annuity.

The tax implications of an annuity transfer can vary depending on several factors, including the type of annuity, the nature of the transfer and your individual circumstances. Some tax considerations to keep in mind when transferring an annuity include:

• Qualified annuities. If you have a qualified annuity, such as a traditional IRA annuity, transferring to another traditional IRA annuity, you maintain the funds' tax-deferred status. The funds move directly from the old account to the new account without you taking possession of the money. Taxes are deferred until you make withdrawals from the new account.

• Nonqualified annuities. If you own a nonqualified annuity and transfer it to another nonqualified annuity, the transfer generally isn't a taxable event. If transferred via a 1035 exchange, taxes are deferred until you withdraw earnings or gains from the new annuity.

• Roth IRA conversion. If you transfer funds from a qualified annuity, such as a traditional IRA to a Roth IRA annuity, it's considered a Roth conversion, which is a taxable event. You pay income taxes on the amount converted in the year of the transfer.¹

• Partial withdrawals or surrenders. The portion of the withdrawal that represents earnings or gains may be subject to income taxes. Surrendering an annuity before the end of the surrender period can also result in surrender charges and potential tax penalties.

If you would like to take advantage of an alternative annuity product, whether it's a nonqualified or qualified annuity, you'll want to utilize the benefits of either a 1035 exchange or a custodian-to-custodian transfer to maintain the tax-deferred benefit of your annuity contract. You only can transfer to a like category, qualified to qualified or nonqualified to nonqualified. Also, the owner of the current annuity and the new annuity must be the same.

Before deciding to transfer an annuity, carefully review your existing annuity contract, understand any surrender charges or fees and consider the tax implications. Consulting with a financial advisor can help you assess whether a transfer aligns with your overall financial plan and goals. Keep in mind that annuity transfers may not be suitable for everyone, and you should make the decision based on your individual circumstances and objectives.