Can You Transfer a Retirement Annuity Contract?

Today’s topic is transferring a retirement annuity contract.

In some situations, transferring an annuity may make sense. However, this topic is important because some agents try to move existing annuities into new ones simply to generate a new commission.

This practice is often called flipping, twisting, or churning an annuity.

Because of this issue, the annuity industry has implemented safeguards designed to protect consumers when a transfer is requested.

Key Takeaways

Some agents attempt to move existing annuities into new contracts to create commissions
Transfers must be proven mathematically to be better contractually for the consumer
IRA annuities can transfer IRA to IRA as a non-taxable event
Roth IRA annuities can transfer Roth IRA to Roth IRA without triggering taxes
Non-IRA annuities can transfer using IRS Section 1035 without triggering taxes
Income rider values typically do not transfer when moving to a new annuity

Why Transfers Are Closely Reviewed

When transferring an annuity to a new contract, the application must include a side-by-side comparison of the current policy and the proposed policy.

This comparison must show mathematically that the new contract is better contractually for the consumer.

If the existing annuity provides stronger guarantees, the new carrier may reject the transfer.

These guardrails exist to help prevent agents from replacing annuities unnecessarily.

However, paperwork can sometimes be manipulated to make a new contract appear better than it actually is.

Understanding Non-Taxable Annuity Transfers

In many cases, transferring an annuity can be done without triggering taxes.

For example:

If an annuity is held inside an IRA, it can transfer from IRA to IRA as a non-taxable event.

If the annuity is inside a Roth IRA, it can transfer from Roth IRA to Roth IRA without taxes being triggered.

If the annuity is funded with non-IRA money, the IRS allows transfers under Section 1035 of the tax code.

A 1035 exchange allows an annuity to transfer from one contract to another without creating a taxable event.

The Income Rider Issue

Many annuities include an Income Rider.

The Income Rider value is often significantly higher than the accumulation value of the annuity.

However, if the annuity is transferred, the amount that moves to the new contract is typically the accumulation value, not the higher income rider value.

This distinction is important because the Income Rider value is used only to calculate lifetime income.

It cannot be transferred to another annuity.

Why Many Transfers Do Not Make Sense

In many cases, transferring an annuity does not produce a better contractual outcome.

Insurance companies design income riders in a way that encourages the policyholder to remain with that contract.

Because of this, the highest lifetime income often remains with the original annuity.

In many reviews of existing contracts, the best advice is often to stay with the current policy.

Be Careful of Bonus Sales Pitches

Sometimes agents try to convince consumers to transfer annuities by promoting an upfront bonus in the new contract.

However, an upfront bonus is not free money.

Bonuses are often applied to the income benefit side of the annuity rather than the actual accumulation value being transferred.

Because of this, a bonus alone does not mean the new contract is better.

Verifying Your Current Income Guarantee

One of the best ways to evaluate a potential transfer is to contact the insurance company that issued the current annuity.

Customer service representatives can review the policy and explain the contractual income benefit available.

This allows the policyholder to understand the guaranteed income before considering any transfer.

Bottom Line

Transferring a retirement annuity contract is possible, but it should only occur if the new contract provides a better contractual outcome.

Many transfers occur as non-taxable events through IRA transfers or Section 1035 exchanges.

However, Income Rider values usually do not transfer to new contracts, and many existing policies provide stronger guarantees than replacement products.

Before transferring an annuity, it is important to verify the contractual guarantees and evaluate whether the new contract truly provides a better outcome.