Annuities are investment products issued by insurance companies that pay a combination of tax-free and taxable income to investors based on a number of variables, such as the amount invested in the contract and the life expectancy of the investor. Immediate annuities are contracts that begin paying fixed monthly interest payments within 30 days after the initial investment. While immediate annuities used to be a straight exchange of principal for guaranteed interest payments, investors can now liquidate or exchange immediate annuities whenever they would like, subject to interest or tax penalties.
Step 1
Research your options. Some annuity companies will allow you to make a commission-free exchange into another one of their insurance products, while others will not. Other firms may offer to pay any exchange or sales fees you may incur if you will invest in one of their products. Contact your financial adviser to help you explore your options, or speak with a representative at the insurance companies with products of interest to you.
Step 2
Review IRS penalties. In addition to any fees or taxes you may owe if you sell or exchange your annuity, the IRS will also impose a penalty of 10 percent if you physically withdraw funds from your annuity before you reach age 59 1/2. As long as you exchange your annuity into a similar product, known as a 1035 exchange, or roll over your funds into an IRA or other qualified retirement plan, you can usually avoid the 10 percent penalty.
Step 3
Ask what your surrender penalties might be. Although you might be able to avoid IRS penalties if you sell or exchange your annuity, your insurance company may charge you a substantial fee to sell or otherwise liquidate your annuity. Known as surrender fees, the charges can be as much as 7 percent if you sell your annuity within a year after you purchase it, although the fee typically declines by 1 percent or more for each year you hold the annuity.
Step 4
Select where you want your money to go. Once you have reviewed all your options, contact a representative where you want your annuity money to go and ask for the relevant paperwork for the transfer. If you are truly liquidating your annuity and keeping the cash, ask your insurance company for liquidation paperwork.
Step 5
Complete the appropriate forms. Regardless of the ultimate destination of your money, annuities are not like stocks which can simply be sold on an exchange and cashed out. Whether you are transferring, rolling over or withdrawing your funds, you will have to fill out relevant paperwork indicating that you understand the ramifications of your decision.
Step 6
Verify your actions. After you have filed your paperwork, confirm that your instructions are followed in a timely manner to avoid negative repercussions. For example, if you intend to roll over your assets, they must be deposited in a new account within 60 days or the rollover will be treated as a taxable distribution.
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