Can I roll VA into Traditional IRA tax-free?

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dct1970
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Joined: Fri Mar 13, 2015 2:54 pm

Can I roll VA into Traditional IRA tax-free?

Post by dct1970 » Sat Mar 21, 2015 8:55 pm

I have a VA that comes out from under surrender fees this summer. I am planning to roll it into my new Vanguard Traditional "Rollover" IRA. I even called Vanguard to make sure a "Rollover" IRA could receive a VA...my inference was, of course, a tax-free rollover from VA to Traditional IRA. But I did not explicity ask about tax-free. Their answer was "yes".

But last night I was reading my new copy of The Boglehead's Guide to Investing and on page 46 it states: "...you might want to consider doing a tax-free transfer (they're known as 1035 exchanges) to a low-cost annuity provider."

So is this "1035" exchange the only tax-free option to get money out of the VA structure? Is this money just stuck in a VA [either where it is now or transfered to somewhere else] unless I take the tax hit?

I just want out of the VA structure. It was an ignorant mistake on my part to get into it and I've been kicking myself for 7 years.

If my only option is to take the tax hit, what would it be? Treated as regular income? Any penalties?

Thanks for your information!

mnvalue
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Re: Can I roll VA into Traditional IRA tax-free?

Post by mnvalue » Sat Mar 21, 2015 9:40 pm

Is your VA inside an IRA already? If so, then you can rollover the IRA, and changing investments inside an IRA has no tax consequences. If the VA is not inside an IRA already, then you should calculate your cost basis in the VA before deciding what to do: http://moneyover55.about.com/od/underst ... change.htm

Alan S.
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Re: Can I roll VA into Traditional IRA tax-free?

Post by Alan S. » Sat Mar 21, 2015 9:44 pm

A non qualified annuity cannot be rolled into an IRA. A 1035 exchange only applies between non qualified annuities, so the VG rep either did not understand the question or was not properly trained. Note that you CAN have an IRA annuity, but it must be purchased with money already in the IRA.

A tax free exchange of non qualified annuities will not be currently taxable, but you are still in a NQ annuity. To get your money out you will have to terminate the annuity and that is a taxable event. To the extent you receive more than your investment in the contract, the excess amount is taxed at the full ordinary income rate. If under 59.5 and if you do not qualify for an exception, you will also owe a 10% penalty on the amount of gain.

Perhaps surrender penalties have ended after 7 years, but if not and you are close to the end of the surrender period, you might want to retain the VA until the surrender period ends.

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grabiner
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Re: Can I roll VA into Traditional IRA tax-free?

Post by grabiner » Sun Mar 22, 2015 11:22 am

Alan S. wrote:Perhaps surrender penalties have ended after 7 years, but if not and you are close to the end of the surrender period, you might want to retain the VA until the surrender period ends.
Usually, surrender penalties decline over time, so it is worth paying a small surrender penalty to avoid paying higher expenses while waiting it out. For example, if you have a 2% surrender charge which will go away if you hold the annuity for two more years, but you are paying 2% extra expenses on the annuity, it's better to cash out now. (And this is even more true if you will cash in the annuity and pay taxes on the gains; keeping the money in the annuity will increase the taxable portion.)
Wiki David Grabiner

dct1970
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Joined: Fri Mar 13, 2015 2:54 pm

Re: Can I roll VA into Traditional IRA tax-free?

Post by dct1970 » Sun Mar 22, 2015 2:13 pm

Thanks to everyone for the feedback. Clearly my ignorance abounds on this so I've got to go read my contract. I know that most what I put in it 7 years ago was from a defined contribution account from a former employer. So it may well be qualified. If it is, can I just roll it to traditional Ira tax-free?

I put in about $55k with no other contributions and last I looked it was worth about $106k. I'll go back thru my records for exact numbers and use the suggested calculator but looks like my gain is about $50k. And I'm 45 so I'd have the penalty also.

I'll do more homework and be back next weekend with what I figured out.

Thanks for the help so far.

MN Finance
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Re: Can I roll VA into Traditional IRA tax-free?

Post by MN Finance » Sun Mar 22, 2015 3:04 pm

dct1970 wrote:Thanks to everyone for the feedback. Clearly my ignorance abounds on this so I've got to go read my contract. I know that most what I put in it 7 years ago was from a defined contribution account from a former employer. So it may well be qualified. If it is, can I just roll it to traditional Ira tax-free?

I put in about $55k with no other contributions and last I looked it was worth about $106k. I'll go back thru my records for exact numbers and use the suggested calculator but looks like my gain is about $50k. And I'm 45 so I'd have the penalty also.

I'll do more homework and be back next weekend with what I figured out.

Thanks for the help so far.
Based on your statement you have an IRA with an annuity co that could indeed be transferred to a vanguard IRA without any tax consideration.

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