Client Question: “I’m unhappy with my annuity. What are the tax implications of changing it?”
You have invested in an annuity. After a period of time, you review the results of your investment and determine that the annuity is not doing what you wanted it to do when you made the investment. A tax-free exchange to a new annuity sounds attractive, but how does it work?
Section 1035, Tax-Free Exchanges, of the Internal Revenue Code explains the process. In 2011, the IRS amended the procedures on the tax treatment of tax-free exchanges of annuities. The changes are effective for exchanges completed on or after October 24, 2011 and are much more favorable as compared to the old provisions.
The basic premise of “tax-free exchanges” is you, the investor, never take possession of the “funds” during the transfer to the new annuity. You establish the new annuity with a new insurer. Then you have the old company transfer the “funds” directly to the new company. This transfer can be of all of the funds or part of the funds.
There are certain conditions that have to be meet to perfect the tax-free exchange provisions regarding distributions from the new annuity.
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To preserve the “tax-free” status |
Old Provisions |
New Provisions |
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Time period that distributions are taken from the new annuity |
After 365 days |
After 180 days |
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Or if taken after age 59 ½, death or disability |
Apply |
Do not Apply |
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An annuity exchange can carry significant tax consequences if done improperly. Before you complete a transfer, contact your ShindelRock representative to make sure this remains a tax-free event for you.
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I also want to invest in charitable annuity. But I want to know the tax implications related with it. Your blog has provided me good information regarding it, but I want to know more about it.
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charitable annuity