There are several ways to exit a retirement fund. If it is in an Individual Retirement Account (IRA), you can transfer or roll it over. If it is not in an Individual Retirement Account (IRA), you can use a 1035 exchange or surrender it. If the retirement fund provides income, you must find someone to buy it from you.
When it is in an Individual Retirement Account (IRA)
If you have a variable retirement fund owned within an Individual Retirement Account (IRA), you can transfer your money from the variable retirement fund to a traditional retirement account at a bank, mutual fund company, or brokerage firm. Since the funds are still within the wrapper of the Individual Retirement Account (IRA), it is considered a transfer or rollover, and no taxes are owed.
Some retirement funds may impose surrender charges if you withdraw funds from them during the surrender period. The surrender period typically ranges from six to eight years from the purchase date, but some may last up to ten years. Surrender charges are a percentage of the total amount withdrawn and will gradually decrease over time. For example, there may be an 8% surrender charge in the first year, decreasing by 1% each year until it no longer exists.
Before canceling or exchanging any variable retirement fund, check for any applicable fees. If the surrender charges are high but will be lower in a few years, it may be best to wait a few years before transferring the Individual Retirement Account (IRA) to a different account.
If there are no surrender charges or they are very low (2% or less), in many cases, you can reduce your expenses from 2%-3.75% annually to 0.5%-1% annually by transferring the variable retirement fund within the Individual Retirement Account (IRA) to a portfolio of index funds. These ongoing low fees can lead to significant savings over time. If you can reduce fees by 2% annually on a $100,000 investment, you will save more than $20,000 over ten years.
Exiting a Variable Retirement Fund That Is Not in an IRA
If you have a variable retirement fund that is not within an Individual Retirement Account (IRA) or any other type of retirement account, such as a 403(b), before canceling the retirement fund, for tax purposes, you will need to determine whether you have a variable retirement fund gain or loss. To do this, you will first need to know the cost basis of your retirement fund. The cost basis is the total amount of money you have put into the retirement fund. If you do not know the cost basis, call the customer service number on your statement and ask. Then, compare the cost basis to the current value of your variable retirement fund.
If you have a retirement fund gain, you will pay ordinary income taxes on any gain. If there is a significant gain in your retirement fund, rather than withdrawing the fund, you might exchange it (known as a 1035 exchange) for a variable retirement fund with lower fees. For example, TransAmerica offers a retirement fund with very low fees. If you have a minimal gain in your retirement fund, you may want to withdraw the fund and use the money to invest in other lower-cost alternatives by opening a mutual fund or brokerage account.
If the current value of your variable retirement fund is less than the cost basis, then you have a loss. If you cancel the retirement fund, you may be able to claim this loss on your tax return. Be cautious when canceling a variable retirement fund that has a loss, as in these cases, the death benefit available in the fund may at least equal the cost basis. By canceling the fund, you would be relinquishing some level of the death benefit available.
Exiting
From the Internal Pension Fund
The internal pension fund is a retirement fund that pays you a monthly amount. It can be difficult to resolve this type of pension fund. You need to find someone who values the continuous stream of payments and offers you a lump sum. Compare several companies before making a decision about the offer.
Other Considerations
A pension fund is a contract with the insurance company. Some pension funds guarantee a certain level of retirement income, so make sure you understand all the guarantees before exiting the pension fund. You may cancel an insurance benefit that you won’t be able to replace. If you understand the benefits and they have no value for you, exiting your pension fund is your best option.
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Sources:
- Internal Revenue Service. “Publication 575: Pension and Annuity Income,” Pages 20, 28.
- Investor.gov. “Updated Investor Bulletin: Variable Annuities.”
- Govinfo. “26 U.S.C. 1035 – Certain Exchanges of Insurance Policies.”
- Internal Revenue Service. “Publication 575: Pension and Annuity Income,” Page 22.
Source: https://www.thebalancemoney.com/how-to-surrender-or-exchange-your-variable-annuity-2389026
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