Transferring an annuity to a new company can be tricky, as withdrawing an annuity contract typically incurs a heavy tax penalty. However, there is a way to change your annuity contract without withdrawing your old annuity and purchasing a new one.
Key Facts About Transferring an Annuity to Another Company
- A deferred annuity that hasn’t been annuitized can be transferred to another company.
- You can complete a tax-free 1035 exchange to trade your annuity at your current provider for an identical annuity product at a different company.
- Withdrawing your annuity and purchasing another one at a different company without the 1035 exchange will likely result in withdrawal penalties.
You can avoid surrender charges and withdrawal penalties by exchanging your annuity through a 1035 exchange. This is a tax-free exchange codified by the IRS to allow taxpayers to exchange one annuity contract for another without incurring any tax liability.
Only annuities that have not been annuitized can be transferred via a 1035 exchange. This means the annuity must not have been converted to a stream of income.
Because of this rule, you cannot transfer immediate annuities to another company, as this type of annuity begins paying out right away. You also cannot transfer a deferred annuity that you’ve already received income payments from.
How To Transfer an Annuity to Another Company
To transfer your annuity to another company without paying taxes or penalties, you must complete a 1035 exchange. Section 1035 of the U.S. tax code governs the transfer of financial products like annuities and life insurance.
In general, products involved in a 1035 exchange must be of the same kind and must have the same owner; you cannot exchange the annuity for a life insurance policy or change the new annuity to a new owner.
The annuities involved in a 1035 exchange can be from different providers and they can be different types. This means if you prefer a different annuity product offered by the new provider, you can choose it while also moving to a different provider.
You cannot cash out the annuity and use those funds to purchase another annuity. Instead, complete the transfer using the following steps:
- 1. Apply for the New Annuity
- Contact the company you want to transfer your annuity to and fill out an application and any compliance forms required for the transfer.
- 2. Inform Your Current Provider
- Tell the company you currently have the annuity with that you intend to complete a 1035 exchange. The new company will likely have given you a letter to send to your current provider to initiate the transfer.
- 3. Complete Paperwork for Both Providers
- Fill out and sign the forms that each company provides you as thoroughly and accurately as you can to avoid any delays in the exchange process.
- 4. Execute the Transaction
- Once you’ve sent in all the completed documents, the old and new annuity companies will complete the 1035 exchange on your behalf. The old company will transfer the value of your annuity to the new company.
1035 Exchange Steps
Once your provider transfers ownership of your contract to another insurer, you can expect the process to be completed in 30 to 45 days.
A 1035 exchange of an old annuity to a new annuity are very common practice. I just did one as my client’s old annuity term ended and he wanted to exchange it for a new annuity that had better features. The idea here is also to avoid paying taxes and keeping the annuity growing tax deferred. I tell all of my clients that at the end of their annuity term, we will review and see if their existing annuity still works for them, or if a different type is better fitting for their current needs. Having the 1035 exchange option at least allows them to have choices.
Aamir M. Chalisa, MBA, LUTCF, MDRTGeneral Manager at Futurity First Insurance GroupAamir M. Chalisa is the GM at Futurity First, leading Oak Brook’s top branch. With 30+ years’ expertise, chairs GAMA Global, driving diversity worldwide.
