Publication 575 - Pension And Annuity Income - 2004 Page 17
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36•
Reinvest the proceeds within 60 days in a single
Transfers of Annuity Contracts
contract issued by another insurance company.
•
If you transfer without full and adequate consideration an
Assign all rights to any future distributions to the new
annuity contract issued after April 22, 1987, you are
issuer if the cash distribution is less than required for
treated as receiving a nonperiodic distribution. The distri-
full settlement.
bution equals the excess of:
•
An exchange of these contracts must qualify as a
The cash surrender value of the contract at the time
tax-free transfer.
of transfer, over
You must give the new issuer a statement containing
•
Your investment in the contract at that time.
the following information.
This rule does not apply to transfers between spouses or
•
The amount of cash distributed under the old con-
transfers incident to a divorce.
tract.
•
Tax-free exchange. No gain or loss is recognized on an
The amount of cash reinvested in the new contract.
exchange of an annuity contract for another annuity con-
•
Your investment in the old contract on the date of
tract if the insured or annuitant remains the same. How-
the initial distribution.
ever, if an annuity contract is exchanged for a life
insurance or endowment contract, any gain due to interest
You must also attach the following items to your timely
accumulated on the contract is ordinary income.
filed income tax return for the year of the initial distribution.
If you transfer a full or partial interest in a tax-sheltered
•
annuity that is not subject to restrictions on early distribu-
A copy of the statement you gave to the new issuer.
tions to another tax-sheltered annuity, the transfer qualifies
•
A statement that contains the words “ELECTION
for nonrecognition of gain or loss.
UNDER REV. PROC. 92 –44,” the new issuer’s
If you exchange an annuity contract issued by a life
name, and the policy number or similar identifying
insurance company that is subject to a rehabilitation, con-
information for the new contract.
servatorship, or similar state proceeding for an annuity
contract issued by another life insurance company, the
exchange qualifies for nonrecognition of gain or loss. The
Tax-free exchange reported on Form 1099-R. If you
exchange is tax free even if the new contract is funded by
make a tax-free exchange of an annuity contract for an-
two or more payments from the old annuity contract. This
other annuity contract issued by a different company, the
also applies to an exchange of a life insurance contract for
exchange will be shown on Form 1099-R with a code “6” in
a life insurance, endowment, or annuity contract.
box 7. You need not report this on your tax return.
If you transfer part of the cash surrender value of an
existing annuity contract for a new annuity contract issued
Treatment of contract received. If you acquire an annu-
ity contract in a tax-free exchange for another annuity
by another insurance company, the transfer qualifies for
nonrecognition of gain or loss. The funds must be trans-
contract, its date of purchase is the date you purchased the
annuity you exchanged. This rule applies for determining if
ferred directly between the insurance companies. Your
investment in the original contract immediately before the
the annuity qualifies for exemption from the tax on early
exchange is allocated between the contracts based on the
distributions as an immediate annuity.
percentage of the cash surrender value allocated to each
contract.
Lump-Sum Distributions
Example. You own an annuity contract issued by ABC
This section on lump-sum distributions only ap-
Insurance. You assign 60% of the cash surrender value of
TIP
plies if the plan participant was born before Janu-
that contract to DEF Insurance to purchase an annuity
ary 2, 1936. If the plan participant was born after
contract. The funds are transferred directly between the
January 1, 1936, the taxable amount of this nonperiodic
insurance companies. You do not recognize any gain or
payment is reported as discussed earlier.
loss on the transaction. After the exchange, your invest-
A lump-sum distribution is the distribution or payment in
ment in the new contract is equal to 60% of your invest-
one tax year of a plan participant’s entire balance from all
ment in the old contract immediately before the exchange.
of the employer’s qualified plans of one kind (for example,
Your investment in the old contract is equal to 40% of your
pension, profit-sharing, or stock bonus plans). A distribu-
original investment in that contract.
tion from a nonqualified plan (such as a privately pur-
Tax-free transfers for certain cash distributions. If
chased commercial annuity or a section 457 deferred
you receive cash from the surrender of one contract and
compensation plan of a state or local government or
invest the cash in another contract, you generally do not
tax-exempt organization) cannot qualify as a lump-sum
have a tax-free transfer. However, a cash distribution from
distribution.
an insurance company that is subject to a rehabilitation,
The participant’s entire balance from a plan does not
conservatorship, insolvency, or similar state proceeding
include certain forfeited amounts. It also does not include
can receive tax-free treatment if you do all of the following.
any deductible voluntary employee contributions allowed
•
Withdraw all the cash to which you are entitled.
by the plan after 1981 and before 1987.
Page 17
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