Most insurance companies follow the law and treat partial transfers between annuities as a tax-free exchange.
But because some companies disregard the law and still treat partial transfers as a taxable event, it’s wise to confirm how the surrendering company will treat the transfer, as taxable or tax-free, before paperwork is submitted.
The question has to be asked, “Why would anyone want to make a partial tax-free transfer to another annuity?” Here are some reasons:
1) Policy features. The ability to add money to a flex-pay annuity is a key policy feature to consider. For example, some clients own flex-pay annuities where they can add as little as $100 as often as they wish and the money is 100% liquid because the surrender penalties have expired forever. They are guaranteed to earn a minimum rate of 3.5%. The smart clients recognize this as a great contract and they don’t want to give it up. However, some have large amounts of money in the contract. They often transfer a majority of those funds to another annuity to earn a higher rate but leave a small amount in the flex-pay annuity in order to “keep it open.” That leads to the second reason.
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2) Higher rates. If a client has $102,000 in an annuity, he/she may transfer $100,000 of that amount to another company to earn a higher rate on the bulk of the funds. The client leaves the remaining $2,000 in the flex-pay annuity, where he/she can add smaller amounts in the future.
The rationale here is that, although the new annuity at Company B may be paying a higher rate for the next five years, the minimum guaranteed rate may be a lowly 2%. By keeping the annuity “open” at Company A, the client may transfer the money back to the “open” contract from Company B at the end of the five-year period. I hasten to add, some companies allow partial transfers into an existing annuity and some don’t.
3) Maximize safety. Another reason may be the client does not want to have too much money in any company. Some people are super safety conscious. They simply won’t have more than $100,000 in any one bank or savings and loan. They want their money protected under the law in event the financial institution fails.
This extends to annuities. Clients have called me and said, “I’ve been asleep at the wheel and wasn’t paying attention. I have $160,000 in an annuity at Company A. I want to transfer half of it to Company B. How do I do it?” I tell them, “My office will complete all the forms you need and send them to you. All you’ll have to do is sign the forms and mail them back to me. We’ll handle it from there.”
4) Ladder rates. Some people have read an article about the wisdom of “laddering” rates. So, they call and say, “I want to move a third of my money to a three-year annuity at Company B, a third to a five-year annuity at Company C, and leave a third at Company A. When rates go up, I’ll move what’s left at Company A.” My response is, “That sounds like a wise move to me. I’ll send you the forms.”