How do I transfer out of a Roth IRA annuity?

Q: I have a Roth IRA fixed annuity with an insurance company. Can I have them do a direct transfer to a bank for a Roth IRA CD? I might want to do this if CD rates improve. I am 57, and beyond the surrender penalty period for the annuity. That annuity guarantees 3 percent.

A: There are three sets of issues to contend with when you make this kind of transfer:

  1. Annuity contract issues
  2. Tax issues
  3. Investment issues

Fortunately, it seems you have a good handle on the details involved, so now it's just a case of following the right procedures.

Regarding the annuity contract, the surrender penalty period that you mention is probably the biggest issue. Annuity contracts typically carry a fairly heavy penalty for early surrender in the first years of the contract, and then this penalty slowly diminishes over time. If you are completely past the penalty phase, you should be able to make a cost-free transfer. Still, you will want to check with the insurance company on their transfer policies; chances are, there is a notice period required before you can make a transfer, so you will want to know what that is and factor it into your plans.

You are allowed to make transfers from one Roth IRA into another without tax penalties, so the key thing is proper documentation. Make sure you keep copies of letters informing both the insurance company and the bank you are going to that this is a Roth-to-Roth transfer, so that it does not erroneously get reported as a distribution out of the IRA. Note that while there is a five-year period between the start of a Roth IRA and when you can start receiving qualified distributions. In the case of a rollover, this five-year period applies from the start of the original Roth IRA. The clock doesn't re-start upon transfer to another Roth IRA.

Finally, as to investment issues, a 3 percent interest rate sounds pretty good these days, but you are right to anticipate a time when CD rates might be higher than that. Not only should you follow interest rate trends in general, but you should periodically shop for the latest CD rates, since the best CD rates may cross the 3 percent threshold well before average rates do. Keep in mind, though, that if interest rates are rising rapidly, you might want to consider savings accounts or money market accounts instead, so you can continue to benefit from that rise.

Good luck with your plans, and here's hoping you see bank rates above 3 percent before too many years go by!

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1 Comment
stan senuta 17 March 2012 at 6:50 pm

I have a Traditional IRA Insurance Annuity that is free of surrender charges