Monday, March 29, 2004
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What is a 1035 Exchange?
Swapping Your Annuity May Yield Big Savings
Back when you bought your variable annuity, you were probably told how it could be a terrific tool to help you put away additional money for retirement. There are no maximum contribution limits like those imposed on IRAs or 401 (k) plans. You don't pay tax on the earnings until you make withdraws. You have the ability to invest in a diversified group of investment sub-accounts.
And, because of the built-in death benefit, you know that your heirs will at least receive your initial investment regardless of what happens to the market.
These are all still valid reasons to own a variable annuity. But, over recent years, there have been new developments in these instruments. Money management companies have become more efficient, insurance costs have come down, and the number of investment options has increased. So, this may be an ideal time to review your annuity contract and see if it would make sense to exchange it for another product.
Your cost to own a variable annuity includes:
• Mortality and expense risk charges to cover the risk the annuity company assumes for the insurance risk under the annuity contract
• Administrative fees that may pay for preparing and sending out reports and statements
• Underlying fund expenses for the mutual fund managers who oversee your investments
• Surrender charges that could be assessed if you take out your money before a specified period
Carefully compare your old annuity to any others you may be considering. Make sure the benefits outweigh the costs. And, don't forget that surrender charges could start all over again with a new contract. Whatever you do though, don't just surrender the annuity and then invest the proceeds in a new contract. If you were to do that, you'd have to pay income tax on any gains.
An exchange would be easier and save you current tax dollars. This swap, called a 1035 exchange, will let you transfer the money from one annuity to another without you owing any tax on the gains you've accumulated. All you have to do is fill out an exchange form and the two annuity companies do the rest. Your original annuity company however, may deduct surrender charges before it sends the funds to your new company.
What is a 1035 Exchange?
Swapping Your Annuity May Yield Big Savings
Back when you bought your variable annuity, you were probably told how it could be a terrific tool to help you put away additional money for retirement. There are no maximum contribution limits like those imposed on IRAs or 401 (k) plans. You don't pay tax on the earnings until you make withdraws. You have the ability to invest in a diversified group of investment sub-accounts.
And, because of the built-in death benefit, you know that your heirs will at least receive your initial investment regardless of what happens to the market.
These are all still valid reasons to own a variable annuity. But, over recent years, there have been new developments in these instruments. Money management companies have become more efficient, insurance costs have come down, and the number of investment options has increased. So, this may be an ideal time to review your annuity contract and see if it would make sense to exchange it for another product.
Your cost to own a variable annuity includes:
• Mortality and expense risk charges to cover the risk the annuity company assumes for the insurance risk under the annuity contract
• Administrative fees that may pay for preparing and sending out reports and statements
• Underlying fund expenses for the mutual fund managers who oversee your investments
• Surrender charges that could be assessed if you take out your money before a specified period
Carefully compare your old annuity to any others you may be considering. Make sure the benefits outweigh the costs. And, don't forget that surrender charges could start all over again with a new contract. Whatever you do though, don't just surrender the annuity and then invest the proceeds in a new contract. If you were to do that, you'd have to pay income tax on any gains.
An exchange would be easier and save you current tax dollars. This swap, called a 1035 exchange, will let you transfer the money from one annuity to another without you owing any tax on the gains you've accumulated. All you have to do is fill out an exchange form and the two annuity companies do the rest. Your original annuity company however, may deduct surrender charges before it sends the funds to your new company.
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