This guide can assist you in recognizing the common scenarios and determine the best course of action to get clients’ assets transferred. The main types of transfers you will encounter when working with annuity contracts are listed below. Also listed are some pointers to navigate some common pain points.
Due to differing terminology and paperwork used by various firms, navigating the transfer of assets process can lead to confusion. There are, however, always basic aspects of the transactions.
The most important aspect to remember when transferring annuity funds is that annuities are treated under federal tax law as tax-deferred vehicles. This means that the owner generally pays tax on the gains inside the annuity only when they are distributed.
A 1035 Exchange is an exchange of one non-qualified annuity contract (or other eligible contract) for another non-qualified annuity contract (or other eligible contract), whether with the same or different carrier. Funds are sent directly to another financial institution as a non-taxable event, meaning the funds will fund a new annuity contract or other eligible contract. Both the non-taxable portion and gain or taxable portions are transferred to the new contract. The IRS recognizes these transfers as non-taxable events, provided that the exchange meets all the technical and legal requirements.
A customer may not liquidate or surrender an annuity then immediately apply these funds to a new contract and qualify for 1035 treatment*. A customer will need to complete the receiving firm’s proprietary 1035 Exchange / transfer paperwork. If the customer’s funds are still within the surrender charge period, these charges will be assessed at liquidation, which may reduce the amount transferred. As part of this paperwork, the receiving firm will also notify the ceding/delivering firm of the type of transfer, so that the tax treatment is correct. A delivering firm will also calculate and notify the receiving firm of the customer’s cost basis.
A 1035 Exchange will receive a tax coding of “6”, noting for the IRS that no tax liability is incurred for that tax year.
*This tax-deferred treatment of the funds by the IRS is only for transferring the funds directly to a new, identical annuity contract with the same ownership/annuitants. Liquidations and surrenders that deliver funds to the owner or to a brokerage or other non-annuity investment is a taxable event.
An IRA-to-IRA Transfer (or “transfer” for short) is a type of carrier-to-carrier or institution-to-institution transfer of funds from one IRA to another IRA. Funds are sent directly to another financial institution to fund the new investment1 as both a non-taxable and non-reportable event.
A customer will need to complete the receiving firm’s proprietary IRA transfer paperwork, and specifically indicate that this will be an IRA-to-IRA transfer. Often, the receiving firm will require a Letter of Acceptance (LOA), which signifies to the delivering firm that they may treat this as non-taxable and non-reportable.
The Letter of Acceptance (LOA):
The LOA may be as simple as a section of the transfer form containing language that identifies the receiving account as an IRA, or a separate letter signed off by a delegated authorized signer of the receiving firm. The actual process is dependent on a receiving firm’s process, but the standard remains the same: the receiving firm will acknowledge the qualified registration. The tax-deferred treatment of IRAs extends to whether the assets will fund a new annuity contract, or another investment, such as a brokerage account, as long as the funds are invested into an account set up in a compatible registration.
If the customer’s funds are still within the surrender charge period, these charges will be assessed at liquidation, which may reduce the amount of the transfer.
1. The IRS requires that the registrations of the IRA accounts be compatible, and thusly eligible to receive transfers to one another. See the IRS Rollover Chart for further reference to determine eligibility.
A Direct Rollover is the direct transfer of funds held in a qualified retirement plan (such as a 401K, 403B, pension, et al) to another eligible retirement plan, such as an IRA. These differ from transfers in that the funds change registration types, but remain in a tax-deferred, qualified registration. The rules for the retirement plan itself will dictate how and when a customer may process a Direct Rollover, but typically, the plan requires a qualifying event. Qualifying events are typically for retirement/separation of service/termination, which is to say when a customer leaves their employer and are no longer active/eligible plan participants.
The requirements for a Direct Rollover differ from plan to plan, so the participant must inquire with the plan administrator to determine the requirements. Some plans require distribution or withdrawal paperwork, or, more and more frequently via an online portal where the participant attests to their qualifying event and directs how their retirement savings are to be distributed. For example, distributions will be fully taxable to the participant if elected as lump sum payments to themselves. (60-Day/Indirect Rollovers are discussed below). In addition, mandatory 20 percent federal income tax withholding (and possibly state withholding) applies to any distributions made to the participant.
To process a Direct Rollover, customers will typically direct the plan to pay out the sum directly to the name of the custodial institution that carries the new qualified account For Benefit Of (FBO) the customer. As such, payments would not be negotiable by the customer, since they are not the payee for the sum. These transactions generally do not result in a taxable event for the customer (unless rolling over to a Roth IRA), as the delivering firm and the receiving firm will report the transaction accordingly – but these must be accounted for and reported on the customer’s tax filing for the year. What is most important to remember is that for a Direct Rollover, the customer usually initiates the transaction with their current plan administrator.
Note: Plan administrators may require a Letter of Acceptance from the new custodian.
If a distribution from an IRA or a retirement plan is paid directly to a customer the IRS will allow the funds to be deposited back into a qualified plan (all, or a portion of the full amount) such as an IRA or another retirement plan* within 60 calendar days.
Note: The IRS mandates that a customer has 60 days from the date he or she receives a distribution from an IRA or retirement plan to roll it over to another plan or IRA. The IRS may waive the 60-day rollover requirement in certain situations if you missed the deadline because of circumstances beyond your control, but NYLife cannot provide guidance in these scenarios. A customer will need to have their tax advisor assist them in applying for a waiver and explaining the mitigating circumstances.
Beginning January 1, 2015, one can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own (see IRS Announcement 2014-32). One can, however, continue to make unlimited number of trustee-to-trustee transfers between IRAs. One can also make an unlimited number of rollovers from traditional IRAs to Roth IRAs (conversions).
One may roll over all or part of any distribution from your IRA except:
This information is being provided as a guide to ensure a seamless transfer, and to maintain a good relationship with our agents and customers. It is not intended to replace the processes or procedures of the various institutions.
The IRS allows account holders to request non-taxable transfers between various financial institutions. In order to ensure a seamless process and take advantage of this benefit, the following steps are recommended.
Contact the financial institution that holds the existing account and inquire about:
Generally, the following documents are needed to initiate a transfer; however, a quick call to the existing financial institution is recommended.
Here are a few of the most common reasons for processing delays. They include missing paperwork or inaccurate information.
Once the above steps have been completed, the transfer paperwork may be submitted to the existing financial institution.
The above information is being provided as a guide to ensure a seamless transfer, and to maintain a good relationship with our agents and customers. It is not intended to replace the processes or procedures of the various institutions.
If you have questions, or wish to clarify any of the information above, please contact our Customer Service Representatives at 1-800-762-6212. They are available Monday through Friday from 8:30 am to 5:30 pm EST.
Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Clients should consult their own tax, legal, or accounting professionals before making any decisions.