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With an IRA annuity, you face a taxable gain on any amount withdrawn because these funds were accumulated with pretax dollars.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.