Generally, when you sell one security and you buy another, you pay tax if you have a gain on the security sold. Not so with annuities if exchanged the correct way--the tax can be avoided. In this post you will have the exchange of annuities explained.
Many are probably not aware that IRS Section 1035 of the tax code permits you to obtain a fresh annuity in exchange for an existing annuity without tax impact. But, before availing this particular exchange offer, it is prudent to analyze the likely repercussions to ascertain whether the exchange will be beneficial to you or not.
Broadly speaking, exchanging annuities could possibly be classified into three several types - Fixed Annuity (FA), Variable Annuity (VA) and Equity-indexed Annuity (EIA).
Exchange of Fixed Annuities Explained
Why do people exchange fixed annuities? Primarily because they can get a better rate with another annuity company. This would also include an attractive bonus rate being paid by another company. But be careful about making a change for the reason of bonus rates. The second reason is because of better terms or features. As an example, some annuities now have a long term care insurance component built into the contract. Hopefully, you are getting some insight into the exchange of annuities explained. The third reason might be for safety. If the safety rating of the original annuity company has been downgraded, the investor may wish to exchange to a better rated company.
Exchange of Variable Annuities Explained
Let's explain the exchange of variable annuities. By far, the number one reason someone would exchange one variable annuity for another is poor investment performance. To say that differently, the investor seeks to have a different menu of investment options that they believe will hopefully perform better. The second reason for exchange could be the availability of enhanced riders on the new annuity. In the last 10 years, many variable annuity companies have introduced riders like the guaranteed minimum income benefit rider or guaranteed minimum payment rider that could be attractive features to an annuity owner.
Keep in mind, that when ever a variable annuity exchange is undertaken, the following must be considered:
New Surrender charges. if the new annuity has a ten-year term, then there will be 10 years of surrender charges.
Mortality and expense risk expenses: charged by the insurance company for the mortality risk
Management fees: This is towards documents and administration costs.
Fund charges: This concerns the investment options
Unique feature charges (riders): This is for a new likely death benefit and for providing guaranteed minimum income.
Although you may have your own reason for attempting to exchange a variable annuity contract for a brand new annuity contract, it may still be advantageous to ponder over the advantages and disadvantages of such an exchange:
Exchange of Indexed Annuities Explained
You should be aware that premature surrendering of indexed annuities will negate any accrued index related gain. Therefore, never close an indexed annuity prior to the end of the term. Exchanges should be made only at the end of the term to an indexed annuity that may have a superior participation rate, a higher cap, or other features that allow you as the investor to earn more.
Guarantees offered by the company are related to the actual claims paying capability of your concerned insurance company. The earnings are treated as ordinary income and withdrawals made prior to your own attaining 59 ½ years can attract a ten percent penalty.