Process

• The process involved with moving an annuity to an IRA requires liquidating the annuity. IRAs only accept cash distributions. This also means that you must pay tax on the money in your annuity prior to being able to transfer the funds into an IRA. There is no option to transfer an annuity tax-free into an IRA. Call your insurance company and request the paperwork required for liquidating your annuity. Fill out the paperwork and turn it in. You should receive your funds within 30 days.
  
  

Significance

• The significance of liquidating your annuity is that you are losing your insurance contract. By liquidating the contract, you add all gains in the contract to your gross investment income. The gains are any amounts in excess of your contributions to the policy.
  
  

Benefits

• The benefit of moving an annuity to an IRA is the additional tax benefit you get from the IRA. Annuities only accept after-tax contributions. Likewise, annuities are taxed on all of the gains in the policy when you start withdrawing the money from the policy. With an IRA, you are only taxed either on the withdrawals (in the case of traditional IRAs) or on the contributions (in the case of Roth IRAs).
  
  

Disadvantages

• The disadvantage to moving your annuity to an IRA is that you must pay taxes on all of the gains. By liquidating your annuity, the gains are added to your ordinary income. This could move you into a higher marginal tax rate for all of your earned income as well. This means that you not only pay tax on the annuity gains, but you will pay a higher tax on all of your ordinary income if this happens.
  
  

Considerations

• Consider whether you are willing to pay tax on your investment earnings inside of your annuity when cashing it in for an IRA. This is not always the best move, tax-wise. You may want to keep your annuity until or unless you experience a reduction in your income. If you do decide to move your annuity to an IRA, consider a Roth IRA, since the Roth IRA is income tax-free when making withdrawals. Traditional IRAs will create additional tax liabilities in the future on all investment earnings and will not provide any substantial benefit over the annuity, since you would be making after tax contributions to the traditional IRA.