Can You Rollover a Matured Annuity to an IRA?

Thought BubbleAn annuity is a contract that makes a series of fixed payments for fixed period or until you die. A survivor annuity continues paying your beneficiary the same or a different amount. You can buy an annuity with a single contribution — an immediate annuity — or by accumulating contributions over time, which is a deferred annuity.

Qualified Annuities

A qualified annuity is a contract owned by an individual retirement account or by a qualified employer plan, such as a 401(k), 403(b) or 457. You can roll any portion of a qualified annuity to an IRA. This includes contributions, earnings and distributions that are not required minimum distributions. If you roll into a traditional IRA, the transfer is tax-free. A Roth rollover might create taxable income. A nonqualified annuity is a contracts not owned by a qualified retirement account. The Internal Revenue Service doesn’t allow you to roll a nonqualified annuity to an IRA.

Matured Annuities

You can roll an annuity contract into an IRA before or after contract matures. The maturity date, also called the annuity date, is a decision deadline. The annuity owner must decide by this date whether to accept annuity payments or instead take a single distribution. The money you receive that exceeds your cost basis is taxable. Your qualified annuity has a cost basis if you made any after-tax contributions to the annuity. You measure the cost basis on the maturity date and it doesn’t change thereafter.

Single Payment

If you choose the single payment option at maturity, you receive a distribution and the contract ends. You can roll this payment into your traditional IRA if you are younger than age 70 1/2. The rollover is tax-free. You add the cost-basis of your annuity to that of the IRA. When you later take distributions from your IRA, you don’t pay taxes on the cost basis. The single payment rules also apply to policies you surrender before the maturity date.  The policy issuer collects a surrender fee that may vary with the age of the contract.

Roth Conversion

You can roll your contract or single payment into a Roth IRA. If you roll over a contract, you must pay tax on its fair value after subtracting the cost basis. The fair market value is the present value of the annuity payments that will be paid over your life expectancy or contract end date plus any death benefit. If you roll over a single payment, you must pay tax on all but the cost basis. Distributions from the Roth IRA are tax-free, as long as you follow the rules regarding early distributions. A rollover to a Roth IRA from a designated Roth account that is part of your employer plan is tax-free.

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Copyright 2013 Eric Bank, Freelance Writer

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