After conducting a thorough review of your existing variable annuity contract, you may decide it would be best to either surrender your contract and use other investments as alternatives to your variable annuity, or exchange your variable annuity for a new contract that has much lower expenses.
How you go about doing a surrender or exchange will depend on whether your variable annuity is inside of an IRA account or not. Below are the things you will need to know.
Variable Annuity Inside Of An IRA Or Retirement Account
If you have a variable annuity that is owned inside of an IRA account you can simply roll your funds out of the variable annuity and into a regular IRA at a bank, mutual fund company or brokerage firm. Since the funds are still inside of the IRA wrapper, it is considered a transfer or rollover, and no taxes are due on such a transaction. (Make sure there are no surrender charges before you cancel or exchange any variable annuity.)
In many cases by moving a variable annuity inside of an IRA to a portfolio of index funds, you can reduce your expenses by from 2% - 3.75% a year to .50% - 1% a year. This is a significant savings.
Variable Annuity Not Inside An IRA or Retirement Account
If you own a variable annuity that is not inside of an IRA or other type of retirement account, before you cancel the annuity, for tax purposes, you will need to find out if your annuity has a gain or a loss.
Find Out Cost Basis Of Your Variable Annuity
First, you will need to know your annuity’s cost basis. This is the total amount of money you put into the annuity. If you don’t know the cost basis, call the customer service number on your statement and ask them.
Variable Annuity Not In A Retirement Account With A Gain
Next, compare your cost basis to the current value of your variable annuity. If your annuity has a gain, and you cash in the annuity, you will pay ordinary income taxes on any gain. If there is a large gain in your annuity, instead of cashing in the annuity, you can exchange it (called a 1035 exchange) for a no-load variable annuity that has lower expenses.
If your annuity has a minimal gain, you may wish to cash in the annuity and use the funds to invest in other lower cost alternatives to annuities.
In many cases by exchanging a variable annuity to a no-load variable annuity, or to a portfolio of index funds, you can reduce your expenses by from 2% - 3.75% a year to .50% - 1% a year. This is a significant savings.
Variable Annuity Not In A Retirement Account With A Loss
If you the current value of your variable annuity is lower than the cost basis, you have a loss. If you cancel the annuity, you may be able to claim that loss on your tax return. Be cautious of canceling a variable annuity that has a loss, as in these cases the death benefit on the annuity may be at least equal to your cost basis, so by canceling the annuity, you would be foregoing some level of death benefit.