A variable annuity is a tax-deferred retirement account, the value of which varies based on the performance of the underlying portfolio of mutual fund-like investments. A variable annuity is a type of annuity—a financial product that allows an individual to invest money in either a lump-sum payment or scheduled, periodic payments, and then collect a stream of payments at a later time, typically during retirement.
You can roll over qualified variable annuities—those established with pre-tax dollars—into a traditional IRA. Qualified annuities are often set up by employers on behalf of their employees as part of a retirement plan.
Non-qualified variable annuities—those established with after-tax dollars—are not eligible for a rollover to a traditional IRA, but you can move them into other types of non-qualified accounts.
Key Takeaways
- A variable annuity pays out a retirement income that is determined by how well the underlying investments perform.
- A variable annuity differs from a fixed annuity, which provides a specific, guaranteed payout.
- Qualified variable annuities, meaning financial products set up with pre-tax dollars, can be rolled over into a traditional IRA.
- Non-qualified variable annuities, meaning products set up with after-tax dollars, can’t be rolled over into a traditional IRA.
- However, non-qualified variable annuities can be rolled over into other non-qualified accounts.
Characteristics of Variable Annuities
Variable annuities are investment vehicles that have some life insurance benefits. They are popular in retirement planning because they offer tax-deferred growth and certain guarantees on principal, a future income stream, and a death benefit for heirs.
Like other investment products, a variable annuity can be held in either a taxable account or in a tax-advantaged qualified retirement plan. The funds within the variable annuity can be allocated across sub-accounts, which are similar to mutual funds, for participation in the stock market or bond market.
Combined with the unique benefit of guaranteed income, annuity contracts are useful as a pension replacement or as a supplement to other retirement income.
Important
An annuity is a product created and sold by financial companies that gives out a stream of payments to an individual, either at a fixed or variable rate. These products are typically used as an income stream in retirement.
Rolling Over an Annuity to an IRA
Several employer retirement plans come in the form of a variable annuity contract such as a 457 or 403(b) plan, especially in the public sector. When people change jobs, they can still roll over one of these tax-sheltered annuities to a traditional IRA tax-free.
You also have the option to roll over the funds to an IRA and then convert them to a Roth IRA. (You cannot do a rollover to a Roth IRA. You do a rollover to an IRA and then a Roth conversion.) That move will require you to pay income taxes that year on the total amount converted.
Variable annuities purchased outside of the workplace can also be rolled over to another qualified annuity via a 1035 exchange. This is a non-taxable transfer often used to gain access to a new annuity contract with different investment options, better riders, or lower expenses. As long as the funds remain in qualified status, no taxes are incurred.
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