So, you have decided to purchase an annuity. Remember that most fixed annuities only provide annual statements – do not wait a whole year to find out if you have been scammed! The Latin statement caveat emptor, “Let the buyer beware,” has never been more appropriate. No one wants to lose his or her retirement savings to the likes of Bernie Madoff, or be the poster child for shows like “American Greed: Scams, Schemes, and Broken Dreams.” Be knowledgeable about where your funds are going.
The transfer of funds to any investment vehicle is the most vulnerable time for your exposure to fraud. With all of the media and Internet coverage regarding scams against retirement accounts, many of my clients question the mechanics of how their funds transfer to the insurance company to establish their annuity.
Typically, there are three ways to transfer funds to the insurance company:
1) Write a personal check.
2) Perform an Account Transfer, more commonly known as a Rollover.
3) Replace an old annuity with a new annuity using a 1035 exchange.
Let’s review the dos and don’ts for each of these options so you can have peace of mind during this process.
Writing a Personal Check
I have clients come into money from the sale of property, an inheritance, or a CD, and they want their funds to have the opportunity to earn higher interest and be protected from loss.
Warning: Your maximum exposure to fraud is when cash is in your hands like this. When it comes to cash, it is all about the three C’s: Care, Custody, and Control – and who has them.
Have your bank liquidate your funds into your personal checking account. Then ONLY write your check directly to the issuing insurance company of your new annuity. Next, personally call the issuing insurance company’s customer service department to confirm receipt of your funds. If the amounts do not match, contact your State Insurance Department.
Under no circumstances should you make your check payable to the agent or agency that is represented. This is a very common way for scammers to take control of your savings and squander your funds. Most scams are born from the scammer gaining unmonitored control of your savings. At this point, the sky is the limit for providing “Broken Dreams.”
Account Transfer, or Rollover
Each year, several of my clients change jobs or gain control of their 401k or TSP at age 59 ½, and then decide to move their account into an annuity for the safety and guarantees that are offered. By law, you can have a “Custodian-to-Custodian Transfer” prepared, and it is TAX-FREE.
How do you transfer or roll over my tax-deferred funds to the insurance company to start an IRA annuity?
As part of the annuity application, there is a form called “Request For Funds.” You will need to provide the name, address and account number of the institution that currently holds your funds. Usually a signature guarantee is required, and if you are married, both must sign and be notarized.
The “Request For Funds” form will be submitted with your application to the insurance company. You can also specify if you want a portion or the entire amount of your account transferred at this time.
When the insurance company receives your application, the back office takes care of the rest of the transaction. The amount you requested is transferred automatically to your new insurance company to start your new IRA annuity contract.
NOTE: Some companies’ 401k and pension plans will not transfer funds; they will only issue a check in your name. A call to your current company can provide a heads up. If this is the case:
Have your company issue the check made payable to: “The Insurance Company,” FBO (Your Name) / New Account Number
Using FBO (For Benefit Of) allows only the insurance company to open an account in your name. Personally call the issuing insurance company’s customer service department to confirm receipt of your funds.
Take custody of your 401k / TSP made payable in your name if it can be avoided. If this happens, you have 60 days to fund a new IRA and there may be taxes withheld that could come out of your pocket. If not handled correctly and in a timely manner, the IRS could end up taxing the entire distribution amount plus penalties.
This can be one the safest and easiest ways to establish your new annuity account, as long as you do not take possession of your savings. If you must take control of your savings, I have seen as much as 30% withheld by your current company, depending on your age. You would be responsible for making up the funds to establish a new account and filing with the IRS to get your funds back.
Annuity-to-Annuity Transfer, or 1035 Exchange
Perhaps you have inherited an annuity or have an older annuity that does not offer the bells and whistles of today’s “hybrid” annuities, like terminal illness riders, long-term care riders, lifetime income riders, etc., and would like to upgrade. This can easily be done using a tax-free 1035 Exchange.
This means that you can use your current or renewable annuity to fund a new annuity with another company, and you do not have to pay any taxes on the transferred funds.
It is always a good idea to review the terms of your annuity contract with a licensed insurance agent. If you are past your surrender charge period, a tax-free 1035 Exchange can allow you to enjoy the benefits of a new annuity at any time with no cost to you.
If an exchange would incur fees, such as surrender chargers or Market Value Adjustments (MVAs), you need to fully understand all of the costs involved to determine if it could benefit you to start a new annuity at that time.
When your current annuity matures, this is the most efficient and safest way to do business. With a direct company-to-company 1035 Exchange, no one can provide “Broken Dreams.”
In conclusion, you are establishing a paper trail that is easy to follow and highly regulated by the State Insurance Department. Properly placed annuities historically offer one of the safest places to hold your savings. Just asking questions is not enough. Remember, it is up to you to do your homework, because it is your money and no one cares more about your money than you. It’s always worth your time to confirm your decisions, providing peace of mind for you and your family. An annuity is a contract, and whenever you enter into a contract, remember: caveat emptor.
To protect yourself:
- Always request a copy of your original application paperwork for your agent, including the transfer paperwork.
- Always personally call the insurance company and ask for the new business department to confirm the receipt of your funds and account number(s).
- Keep all related forms and the original policy in a safe place.
P.S. – Please share this article with others by simply clicking on the blue social media icons at the top of your screen!
Annuity123 does not offer insurance, investment, or tax advice. You should always seek the guidance of qualified and licensed professionals concerning your personal insurance, investment, or tax matters. Annuity123 is simply a platform allowing retirement planning professionals to help educate the community on various retirement planning topics. Annuity123 does not directly support or take responsibility for ensuring the accuracy of the content displayed in the articles themselves or any feedback that may get added in the Comments section from the community.