Retirement planning often requires flexibility — the investment you choose today may not be ideal five or 10 years from now. An annuity to IRA rollover can give you more flexibility, whether you’re looking to access better interest rates or gain control of your funds when switching jobs. But before making the switch, it’s important to understand how annuity transfer rules might impact your savings.

This article will discuss whether you can transfer an annuity to an IRA without penalty. This is meant to be a high level overview and for your own situation, you should talk with an appropriate qualified professional to see if it may make sense for you.

Can an annuity be rolled into an IRA without penalty?

You can transfer an annuity to an IRA, but it’s essential to understand the IRS’ annuity rollover rules to avoid taxes and early distribution penalties.

Deferred annuity vs. immediate annuity

A deferred annuity is a type of product that insurance companies offer. You contribute a lump sum or series of smaller payments into the account. Then, your funds can accrue interest for several years during the accumulation period. Once the annuity matures, the provider will send you distributions — this phase is called annuitization. You typically can’t roll your annuity into an IRA if annuitization has begun.

An immediate annuity doesn’t have an accumulation period. Instead, you give a lump sum to the provider, and they’ll send payouts anywhere from 30 days to one year after you fund the account. An immediate annuity generally isn’t eligible for an IRA transfer.

Qualified vs. non-qualified annuities

A qualified annuity is funded with pre-tax dollars. Typically, investors hold qualified annuities within retirement accounts like traditional IRAs or 401(k)s. So, these accounts may be eligible for direct rollovers from one retirement plan to another. 

It’s important to note that if you want to transfer a qualified annuity into a Roth IRA this requires some extra steps and may result in a taxable event. 

A non-qualified annuity is funded with after-tax dollars. The IRS doesn’t necessarily allow you to roll these accounts into traditional IRAs, but that doesn’t mean you’re stuck with an account you aren’t happy with. You can conduct a 1035 transfer to exchange one non-qualified annuity for another, which could give you access to better gains or payout options. Note that surrender charges may apply on both the new and existing policies and should be factored into this decision. These also are a time sensitive transfer and could have tax implications if not conducted properly. 

When does an annuity to IRA rollover make sense?

Rolling a qualified annuity into an IRA isn’t always necessary or recommended, but it might be an ideal option under certain circumstances. 

Your annuity contract is about to mature

Most annuities have a maturity date when the accumulation phase ends and the payout period is set to begin. Deferred plans range anywhere from 5–20 years. If you aren’t ready for retirement or distributions to begin by this date, transferring your savings from the annuity to an IRA could help to keep building your savings. 

You want to consolidate your accounts

If you have multiple annuities, tracking separate investments gets unnecessarily complicated. Rolling them into a traditional IRA can make monitoring and managing your accounts easier. Alternatively, you could combine them all into a new qualified annuity to have a similar outcome. 

You aren’t satisfied with your current annuity's performance

Annuity interest rates vary over time and between account type and provider. Transferring to a new institution may give you access to higher interest, which could provide better returns. Be mindful of new and existing surrender charges here as well. 

How to transfer an annuity tax free

To avoid taxes and potential early withdrawal penalties, keep the following in mind:

• Determine whether your annuity qualifies: To be eligible for an IRA rollover, your annuity must be deferred and funded with pre-tax dollars. Additionally, the annuity shouldn’t be in the payout or distribution phase. 
• Start a direct rollover: An easy way to move these funds over is making the transfer directly from the annuity provider to your new IRA provider. These institutions (or a financial advisor) can complete the rollover for you.
• Consider avoiding indirect rollovers: Withdrawing the funds yourself might trigger tax events. For instance, if you take funds out of an employer-sponsored annuity, your company may withhold up to 20% for taxes. And if you don’t reinvest the funds within 60 days, you’ll likely owe income tax and a 10% early withdrawal penalty. Another thing to note with employer-sponsored annuities is they must allow you to rollover the annuity. The plan may not allow you to make these changes if you are still in service. 

FAQ

Should I put an annuity in an IRA?

It depends on your savings goals. You  could already hold qualified annuities in traditional retirement accounts like 401(k)s or IRAs from the start. But it may be beneficial to transfer the funds to a new IRA to access potentially better rates, lower fees, or to consolidate investments and accounts.

Can I transfer my annuity to an IRA before I turn 59½?

Often, yes — if your annuity qualifies for a direct rollover, you’re allowed to transfer it to a traditional IRA without incurring early withdrawal penalties or immediate taxes at any age.

Is transferring an annuity a taxable event? 

Sometimes — this varies depending on what annuities you transfer and how you do so. Direct rollovers often aren’t taxable when completed properly, while indirect rollovers may trigger taxes and fees. If you’re just looking to switch annuity plans, a 1035 transfer may be a good way to avoid taxable events.

If you have any tax questions it is always best to consult with a qualified tax professional. 

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‍This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.