In a recent piece, I talked about some of the disadvantages of variable annuities. The high fees, deceptive guarantees, and tax treatment can make investors feel uneasy.
But what if you’ve purchased a variable annuity and are experiencing buyer’s remorse?
To get out of a problematic variable annuity, you have a few options.
Take the money and run
Terminating the contract is one way to get out of a problematic variable annuity. Yes, you can make a withdrawal. However, depending on the annuity contract and your specific situation, cashing out of an annuity can result in tax penalties and surrender charges, and you may miss out on potential benefits.
When considering cashing out a non-qualified annuity (one that isn’t stored in an IRA), you should compare the annuity’s “cost basis” to its current cash value.
If you’re under the age of 59 1/2, the difference is normally subject to ordinary income tax and may be subject to an additional 10% tax penalty. You’ll also want to think about any surrender charges and when they expire. Most commission-based variable annuities have a “surrender period” during which you must pay a penalty if you want to withdraw money. The surrender charge can be substantial, up to 10% or more in some situations, but it will gradually decrease over time. Surrender charges are commonly used to cover the broker’s up-front commission check.
Pro tip: some annuities provide a “free look” period of a few days during which you can cancel your annuity without paying a surrender price.
It’s also a good idea to look over your annuity contract carefully to discover what benefits you’ll be giving up if you cash out.
Many of annuities’ extra features end up costing more than they’re worth, but some can be beneficial depending on your circumstances.
Even if there are no tax repercussions or surrender charges, an 85-year-old customer in bad health with a variable annuity with a death benefit of $500,000 but a contract value of $400,000 may be better suited keeping their annuity than terminating it.
Due to the complexity of annuity contracts, it’s a good idea to have a specialist examine your contract before making any modifications – one who doesn’t get a commission on product sales.
Exchange or Rollover
The IRS may allow you to exchange one annuity contract for another under Section 1035 of the tax code. This is a good example “You can defer taxes by using a “rescue” method while switching to a lower-cost contract. Investors can swap variable annuities if their existing annuity does not include a surrender charge, but cashing out the annuity would result in a high tax burden. In that instance, it may make sense to convert the annuity for a lower-cost contract from a different provider with much lower fees, no commissions, and no surrender charges than other annuity firms. As a precaution, double-check that exchanging your present contract will not result in any surrender fees or tax ramifications. Because annuity arrangements are complicated, you should seek advice from a tax professional before making any modifications.
In the case of variable annuities owned in an IRA ( “If you have a qualifying annuity, you may usually terminate it and roll the money into a traditional IRA, which allows you to invest in a variety of lower-cost options including index funds, ETFs, or plain old stocks and bonds.
Before making any changes, check to see if there is a surrender price for ending your annuity contract, and assess the benefits and drawbacks of any assurances your current contract provides.
Annuitize or Withdraw Over Time
Annuitization is the process of exchanging the value of your variable annuity for a fixed or fluctuating stream of income payments from the insurance provider. These payments are usually made for the rest of your life or for a certain number of years, and they may include a survivorship option that allows your surviving spouse or beneficiary to continue receiving income payments for a period of time.
If you expect to outlive your expected lifespan, annuitization may be a viable mathematical alternative.
However, the term “lifetime income” used by many annuity providers is a misnomer because, unless you live a long time, the value of the “income” you receive may not surpass what you paid for the annuity in the first place!
It’s also worth remembering that when you annuitize, you normally give up the opportunity to withdraw more than your regular income payout, as well as any death benefits that come with it.
Rather than annuitizing, one option that may make sense, depending on the annuity’s value and guarantees, is to make systematic withdrawals from the annuity.
Some annuities, for example, have a “Guaranteed Lifetime Withdrawal Benefit” rider that allows you to make annual withdrawals of a specified amount (e.g., 5% of the “benefit base”).
Although these riders normally have a high annual cost, the income base may be worth more than the contract value if the underlying investments have performed poorly.
If cashing out or exchanging the annuity isn’t an option, taking annual withdrawals may be a better option.
This “income” may not exceed what you paid for the annuity in the first place, depending on the contract and how long you live, but if you die in the interval, your heirs may collect the contract value or death benefit.
A professional financial advisor can assist you with the calculations.
In the end, variable annuities can be pricey and complicated.
Most people, in my experience, are better served by simpler, lower-cost investments.
And, while getting out of a terrible variable annuity can be tough, it’s critical to learn everything there is to know about your contract.
As a result, you might be in a better position.
Is it possible to get out of an annuity?
Annuitization is the process of converting a fixed, variable, or equity-indexed annuity into a stream of income provided by the insurance company. Partially distributed funds are taxed on a last-in, first-out basis, which means that gains are taxed first. A product that is fully annuitized is taxed on a pro-rata basis. Each distribution will consist of a proportionate mix of principal and profits, lowering the tax burden.
If you have a highly appreciated annuity with no remaining surrender charge but don’t want to annuitize it, you can execute a “1035 exchange” to another annuity product of your choice without incurring any tax consequences.
The base will simply be transferred from one annuity policy to another. Do not, however, perform a 1035 swap into another product that has a long surrender charge.
As my northern neighbors put it, if you’ve passed your free-look time but are still a long way from the conclusion of your surrender term, you’re practically screwed.
Don’t worry, you still have a few options to make the best of the situation. Surrender-free withdrawals are possible in most annuities during each contract year. (The contractyear starts when you sign the annuity contract and ends 364 days later.)
Some annuities allow you to withdraw 5, 10, or even 20% of the contract each year without incurring a surrender price.
Although you must be aware of the taxable implications of the surrender, penalty-free withdrawals allow you to reduce the annuity without being faced with a hefty surrendercharge.
If you bought your annuity in an individual retirement account or a Roth IRA and there was no surrender charge, you can transfer the full balance to another IRA as a trustee-to-trustee transfer, just like any other IRAasset, and avoid paying taxes.
You can send your penalty-free withdrawal to another non-annuity IRA without paying tax if you have a surrender charge. If you’re over the age of 701/2, you may also be allowed to collect your necessary minimum payout from an IRA annuity without paying any surrender charges.
Can I cancel an annuity and get my money back?
New contract owners have a limited time to change their minds and cancel annuities and life insurance policies. The free look time is the name given to this era. The insurance provider will reimburse the entire amount if the policy owner decides to terminate the coverage within the free-look period. The insurer, on the other hand, must pay surrender charges and penalties if the policy owner decides to cancel after the free look period has expired.
Each insurance has a different free look period, which is usually a certain number of days, usually 30 days. The period begins on the day the insurance is received by the policy owner. The length of the free look time is displayed on the policy’s first page.
How can I get money from my annuity without penalty?
Waiting until the surrender period finishes is the most straightforward way to withdraw money from an annuity without penalty. If your contract allows for a free withdrawal, take only the amount allowed each year, which is normally 10%.
Can you cash out an annuity at any time?
Annuity payments and structured settlements can usually be paid out at any time. You can sell a portion or all of your future structured settlement payments for cash right now.
What happens when annuity is out of surrender?
The surrender period is the time an investor must wait before being able to withdraw cash from an annuity without incurring a penalty. Surrender periods can last for years, and taking money out before the conclusion can result in a surrender charge, which is essentially a deferred sales cost. The longer the surrender period, but not usually, the better the annuity’s other terms.
Answer:
Unfortunately, if you are unable to pay your premiums, your life insurance coverage will end. Your money will stay invested if you are unable to pay your monthly retirement annuity contributions, but you will only be able to access it once you reach the age of 55.
Long-term contracts
Annuities are long-term contracts that last anywhere from three to twenty years, and they come with penalties if you violate them. Annuities typically allow for penalty-free withdrawals. Penalties will be imposed if an annuitant withdraws more than the permissible amount.
Can I change my mind on an annuity?
Almost every time you buy an annuity, you’ll have at least 10 days to think about it and back out if your opinion changes. The free look period is a clause in most new annuity contracts that gives the buyer 10 to 30 days to study the contract’s parameters.
How can I avoid paying taxes on annuities?
You can reduce your taxes by putting some of your money into a nonqualified deferred annuity. The interest you earn in both eligible and nonqualified annuities is not taxable until you withdraw it.
When should I start withdrawing from my annuity?
Money cannot be kept in accounts indefinitely. You must withdraw set minimum sums every year beginning at age 70 1/2 or 72, depending on the year you turned 70 1/2.
You must take your first distribution when you are 70 1/2 if you turned 70 1/2 in 2019. If you turned 70 1/2 in 2020 or later, your first payout must be made on April 1 of the year following your 72nd birthday.
Required minimum distributions, or RMDs, are IRS-mandated withdrawals that are taxed.
Some options exist for deferring RMDs, including at least one that utilizes an annuity. However, the IRS is fairly stringent about following the RMD requirements in general.
The IRS will punish an account holder if he or she fails to take an RMD.
What is the surrender charge in an annuity?
If you sell or remove money from a variable annuity during the “surrender period,” a predetermined period of time that normally lasts six to eight years after you purchase the annuity, you must incur a “surrender charge.”
What is a systematic withdrawal from an annuity?
Annuity with a system Instead of pocketing the maximum dollar amount once a year, withdrawals from an annuity are the automated withdrawal of periodic income payments (via penalty-free withdrawals) throughout the year.
A contract owner can make annuity income payments in a systematic manner by:
Check out the accumulating penalty-free withdrawals function if you anticipate you’ll require more deferred income than the allocated amount.
You’ve invested in a typical fixed annuity and wish to get a monthly income from the interest. Automatic monthly payments (through annuity forms) can be withdrawn and deposited into your checking or savings account by contract owners.
