Yes, you can roll over an annuity, but the correct method depends on how the contract was funded. A non-qualified annuity, bought with money you already paid tax on, moves to a new annuity through a tax-free Section 1035 exchange. A qualified annuity, held inside an IRA, 401(k), or 403(b), moves under the same rollover rules that govern any other retirement account. Mixing the two paths, or missing a deadline, can turn a routine transfer into a taxable distribution with a 10% early withdrawal penalty on top.
Moving a Non-Qualified Annuity: The 1035 Exchange
Section 1035 of the Internal Revenue Code lets you swap one annuity contract for another without recognizing any gain, so earnings stay tax-deferred and your original cost basis carries over to the new contract.1Office of the Law Revision Counsel. 26 U.S. Code 1035 – Certain Exchanges of Insurance Policies The exchange can also go into a qualified long-term care insurance contract. Those are the only two destinations that preserve tax deferral.
A non-qualified annuity cannot be rolled into an IRA, 401(k), or any other qualified retirement account. After-tax money and pre-tax money sit in separate categories under the tax code, and the law does not allow them to be combined.
The person entitled to benefits under the old contract must be the same person entitled to benefits under the new one.2Internal Revenue Service. Section 1035 – Certain Exchanges of Insurance Policies, Notice 2003-51 Changing ownership during the exchange breaks the rule, and the IRS treats the transaction as a taxable distribution. Accumulated gains become ordinary income, and if you are under 59½, an additional 10% tax applies.3Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities, Certain Proceeds of Endowment and Life Insurance Contracts
Cost basis matters more than people expect. If you surrender the old annuity for cash and then buy a new one with the proceeds, your basis in the new contract resets to the (smaller) cash amount, and every future dollar of growth above that lower figure becomes taxable. A proper 1035 exchange avoids that reset.
Partial 1035 Exchanges
You do not have to move the whole contract. A partial 1035 exchange transfers part of the value to a new annuity and leaves the rest in the old one. The IRS imposes a 180-day holding rule: no withdrawals from either contract for 180 days after the partial exchange, or the transaction can lose its tax-free status.4Internal Revenue Service. Revenue Procedure 2011-38 – Section 1035 Exchanges Cost basis is split between the two contracts in proportion to the value transferred.
Moving a Qualified Annuity: Retirement Account Rollovers
If your annuity sits inside an IRA, 401(k), or 403(b), it follows the standard rollover rules. The funds have to travel from one qualified account to another to stay tax-deferred.
A direct rollover, sometimes called a trustee-to-trustee transfer, is almost always the safer route. The current carrier sends the money straight to the new carrier, and you never take possession. No withholding applies and the 60-day deadline is irrelevant.
If a 401(k) plan pays you directly instead, the plan administrator must withhold 20% for federal income tax, even if you fully intend to complete the rollover.5Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions To avoid tax on the withheld portion, you have to deposit the entire original distribution amount, including replacing the 20% out of pocket, into the new account within 60 days.
IRA-to-IRA rollovers come with their own quirks. Default withholding on a direct payment to you is 10% (you can elect out), and only one indirect IRA rollover is permitted in any 12-month period across all of your IRAs combined. Trustee-to-trustee IRA transfers do not count against that limit and are the better choice when moving an IRA annuity.
The 60-Day Deadline and When It Can Be Waived
Take personal receipt of retirement funds and you have 60 days from the date of the distribution to redeposit them into another eligible retirement account. Miss the window and the full amount becomes a taxable distribution, with the 10% early withdrawal penalty tacked on if you are under 59½.6Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
If the delay was outside your control, the IRS allows self-certification for a waiver. You write a letter to the receiving trustee certifying that one of the approved reasons applied, including a financial institution error, serious illness, a death in the family, a postal error, or incarceration.7Internal Revenue Service. Revenue Procedure 2016-47 – Waiver of 60-Day Rollover Requirement You have to complete the deposit as soon as the obstacle is removed, with a 30-day safe harbor from that point. Self-certification lets the receiving institution accept the late contribution but does not bind the IRS if the issue comes up on audit.
Required Minimum Distributions Come Out First
Once you reach the age at which required minimum distributions (RMDs) start, currently 73 and rising to 75 in 2033, you must take the year’s RMD before rolling over anything.8The Thrift Savings Plan. SECURE 2.0 and the TSP RMDs are never eligible for rollover. Roll one over by mistake and the excess is an ineligible rollover contribution, hit with a 6% excise tax for every year it stays in the receiving account.9Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements
The sequence to follow: contact the current carrier, take the RMD, then initiate the rollover of what remains.
Inherited Annuities Follow Different Rules
If you inherited an annuity from someone other than a spouse, you cannot use the 60-day indirect rollover at all. A check paid to you is a taxable distribution and cannot be deposited into an inherited IRA afterward. The only workable method is a direct trustee-to-trustee transfer into an inherited IRA titled in the deceased owner’s name for your benefit.
For deaths in 2020 or later, most non-spouse beneficiaries have to drain the inherited account within 10 years. If the original owner had already reached RMD age, annual distributions are required during years one through nine, with the balance out by the end of year ten. If the owner died before RMD age, the timing within the 10 years is up to you, as long as the account is empty by the deadline. Surviving spouses, minor children of the deceased, disabled individuals, and beneficiaries not more than 10 years younger than the deceased can generally stretch distributions over their own life expectancy.
Costs That Reduce What You Actually Transfer
Tax-free does not mean cost-free. Several charges can take a bite out of the balance before it arrives at the new carrier.
Surrender Charges
Most deferred annuities carry surrender charges in the early years. A typical schedule starts at 7% in year one and drops a point each year until it reaches zero around year eight.10Insurance Information Institute. What Are Surrender Fees? Variable annuities can run steeper, as high as 8% in the first two years. Many contracts allow a free annual withdrawal of around 10% of account value without triggering the charge. If you are a few months from the end of a surrender period, waiting can save thousands.
Market Value Adjustments
Some fixed annuities, especially modified guaranteed annuities, include a market value adjustment. The MVA recalculates your account value based on interest rate movements since you bought the contract. Rates up since purchase means a negative adjustment that shrinks what you receive; rates down means the adjustment goes your way. The MVA only applies during the surrender period and only to amounts above the free withdrawal allowance.
Bonus Recapture
Annuities that credited an upfront premium bonus of 1% to 3% usually include a recapture clause. Surrender or exchange within the specified period and the insurer claws back part or all of that bonus. Combined with a surrender charge, leaving a bonus annuity early can cost significantly more than leaving a plain contract.
Riders and Death Benefits Reset With the New Contract
Optional riders attached to the old annuity, including guaranteed death benefits, income guarantees, and step-up features, end when the contract closes. The new annuity begins with its own riders, its own waiting periods, and its own benefit calculations.
That can be a real loss. A death benefit rider that stepped up over many years takes its accumulated benefit base with it when the contract terminates. Older annuities sometimes carried payout rates or features that are no longer sold. Before you move anything, compare the specific riders and guarantees on both sides. A better interest rate or lower fee on the new product may not be worth what you give up.
How the Transfer Actually Gets Done
The receiving carrier generally drives the paperwork. You will need the current contract number, the carrier’s full legal name and mailing address, and a recent statement showing current value and remaining surrender charges. The receiving company provides the right form: a transfer request for qualified accounts, or a 1035 exchange form for non-qualified ones. On the form you specify whether you want a full surrender or a partial transfer.
Get the tax-qualification box right. Labeling a qualified IRA annuity as non-qualified, or the reverse, stalls the transfer and creates reporting problems. Some carriers require a medallion signature guarantee, a verification stamp from a bank, credit union, or broker-dealer in a recognized guarantee program.11Investor.gov. Medallion Signature Guarantees – Preventing the Unauthorized Transfer of Securities A notary seal does not substitute for it.
In a direct transfer the receiving carrier sends the request, the old carrier sends the funds, and you never touch the money. Internal transfers within one company can settle in a few business days. Carrier-to-carrier transfers involving paper processing typically run two to four weeks. The old carrier issues a final statement showing the closure and any charges deducted; the new carrier issues a confirmation with your new policy details. Review both to confirm the full amount arrived and the terms match what you signed up for.
The Free-Look Period Is Your Safety Net
Most states require insurers to give you a free-look period on a new annuity, typically 10 to 30 days after you receive the policy, during which you can cancel for a full refund. Many states extend the window for replacement contracts, which includes anything bought through a 1035 exchange or rollover, often to 20 or 30 days. If the new contract turns out to be something other than what you were sold, you have that window to unwind the transaction without penalty.