- What Happens to Cash Surrender Values After the Final Premium Payment?
- Is A Variable Annuity Death Benefit Taxable?
- Can I Deduct My Surrender Charges in My IRA?
- Is Annuity Inheritance Taxable?
- Can You Rollover an Inherited Qualified Annuity?
- What Are the Differences Between a Future Annuity & the Present Value of an Annuity?
An individual retirement account can own a variable annuity contract. Traditional IRAs require you to begin taking minimum distributions once you reach age 70 1/2. These are your annuity payments. Before reaching this age, your contract accumulates a cash value. You can surrender the contract and receive the cash value as a lump-sum distribution.
A variable annuity is a contract between you and an annuity provider that has two phases: accumulation and distribution. During the accumulation phase, you make one or more payments that the provider, usually an insurance company, invests in mutual funds or marketable securities. You don’t know how much your variable annuity will be worth until it enters the distribution phase because the value depends on your investment performance. In the distribution phase, the provider pays out the annuity over a fixed number of years or until you die. A survivor annuity continues making payments to your beneficiary.
You can withdraw the cash value from a variable annuity during the accumulation phase. This is a “surrender,” and the provider normally charges a surrender fee. To arrange a surrender, contact your provider and fill out the necessary paperwork. You can have the provider perform a trustee-to-trustee transfer of the proceeds to a traditional IRA account and avoid taxes or penalties. If you simply want to cash out the annuity, have the provider write you a check or electronically transfer the proceeds to your bank account. If you take this route, you’ll have to include the distribution in your taxable income unless you held the annuity in a Roth IRA.
A nonqualified variable annuity -- one that doesn't reside in an IRA or qualified employer plan -- shelters your investment earnings until you take a distribution. You don’t get a tax deduction for your contributions, but you can contribute an unlimited amount. When you start taking nonqualified annuity payments, you pay tax only on the amount that exceeds the money you contributed. This is also true if you surrender the contract. If you held the same policy in a Roth IRA, you’d also get no tax deduction, but all distributions would be tax-free. As of 2013, annual IRA contributions are capped at $5,500, or at $6,500 if you’re 50 or older. People with high incomes might be limited or barred from contributing to a Roth IRA.
If you don’t begin taking your annuity distributions from a traditional IRA by April 1 of the year following the one you reach age 70 1/2, the Internal Revenue Service will slap a 50 percent excise tax on the amount you didn't withdraw. If you withdraw the cash value of your annuity from a Roth IRA during the first five years, the IRS will collect income tax and a 10 percent penalty on the earnings portion of the distribution. This also applies to Roth earnings and to any traditional IRA money you withdraw before age 59 1/2, although certain exceptions are available. You can start receiving penalty-free annuity payments before age 59 1/2 by setting up substantially equal payments from the IRA annuity.
- U.S. Securities and Exchange Commission: Variable Annuities: What You Should Know
- The Pro Advisor: Qualified, Non-qualified, and ROTH -– What’s the Difference?
- IRS: Publication 590 Individual Retirement Arrangements
- IRS: Retirement Topics -- IRA Contribution Limits
- IRS: Publication 575: Pension and Annuity Income
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