I don’t like my annuity. What can I do?

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Q. I have money in an annuity and I’m disappointed in its return. I’m able to withdraw 10 percent of the premium each year without penalty. I would like to roll the money into a Certificate of Deposit (CD). Can I have the money wired into my checking account and then open a CD, rolling the entire amount into the CD with no penalty from the IRS? Would that be considered an IRA CD?
— Unhappy

A. You’re smart to do this research before you make a move that could have adverse tax consequences.

Your answer depends on how old you are and whether you purchased the annuity within an IRA account or just individually with non-qualified, after-tax dollars.

If you purchased the annuity within an IRA, then you can simply roll your funds out of the annuity and into a regular IRA at your bank or at a brokerage firm, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

“Since the funds are still inside of the IRA wrapper, it is considered a transfer or rollover, and you can move the money with no tax consequence or penalty even if you are under 59 ½,” he said. “This is a cleaner way to do it instead of wiring the money into your checking account and then contributing it to an IRA.”

If you are still in the surrender charge period – which could be 7 to 10 years from your original purchase – you can stick to the 10 percent limit each year. Once the surrender charge period is over, you can roll the remaining balance into your IRA, he said. You can invest the money in a CD or in any vehicle you want once the funds have been rolled into your IRA.

If instead you’re under 59 ½ and you purchased the annuity with non-IRA money, it gets more complicated. You cannot roll the funds into an IRA at your bank or anywhere else, DeFelice said.

He said the purpose of an annuity is to provide income in retirement. Even if you stick to the 10 percent withdrawals allowed by the annuity provider or if you’re well past your contract’s surrender period, when you take money out of an annuity before you reach the age of 59 ½, you’ll be assessed a 10 percent early withdrawal penalty from the IRS — the same penalty you’d face for making early withdrawals from a traditional IRA or 401(k) plan, DeFelice said. You’ll also owe taxes on any investment gains you may have.

“The only way to avoid this is to do what is called a 1035 Exchange and transfer the funds into another annuity contract,” he said. “However, you need to have a good reason for going this route and you must carefully evaluate whether or not doing so is in your best interest.”

DeFelice said whether or not you should unwind this investment also really depends on a number of other factors, the least of which should be disappointment over any short-term investment results.

He said annuities are long-term contracts with an insurance company and there are many different types that can play unique rolls in a person’s retirement planning. For example, some annuities guarantee your principal while others guarantee you’ll receive a particular level of retirement income.

“Be sure you understand all the guarantees and benefits your contract has before you decide to periodically cash it out,” he said. “You could be giving up a valuable insurance benefit that you would not be able to replace with a CD, especially at today’s low interest rates.”

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This story was originally published on April 30, 2019. 

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.