Facing the consequences when shifting out of an annuity

Q: I have an annuity with an investment firm that is being taken over by another one that I know nothing about. I prefer to roll the money into a money-market account, Roth IRA, or CD. What restrictions are there? Is this feasible when using the money for a high school scholarship fund?
- M.S., via e-mail

A: It depends on whether you own a taxable annuity or an IRA annuity, says J.J. Burns, a certified financial planner in Melville, N.Y. If you're at least 59-1/2 years old and make a total withdrawal on a taxable version that costs $10,000 and is now worth $12,000, you'll have a taxable gain on any amount over the original $10,000.

The investment company might also assess a surrender charge unless you've owned the account long enough.

After paying taxes and surrender charges, the rest can be put into a CD or money- market account. (If you put it in a Roth IRA, Mr. Burns notes that there are annual contribution and income limits.)

With an IRA annuity, you face a taxable gain on any amount withdrawn because these funds were accumulated with pretax dollars. If you own an IRA annuity, Burns recommends initiating a trustee-to-trustee transfer and moving the money to a money market IRA account or a CD IRA account.

If you are transferring the money to a high school scholarship fund with an approved charitable organization, then Burns doesn't see any reason to invest this money in an annuity with tax-deferred status since the charitable organization would already have tax-free status. Within the annuity you're paying higher fees for tax deferral, which you don't need in this instance. It would certainly make sense to have the money invested in a money market, CD, or a good-quality, low-risk bond mutual fund, he says.

You've read  of  free articles. Subscribe to continue.
QR Code to Facing the consequences when shifting out of an annuity
Read this article in
QR Code to Subscription page
Start your subscription today