Annuity vs. IRA Annuity Confusion

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

Recently, a woman found out the hard way what can happen when she was confused over the difference between an annuity and an IRA annuity. As a result, an IRA distribution that she took was taxable to her even though she intended to roll over the funds tax-free to another IRA within 60 days. She asked the IRS for a waiver of the 60-day rollover rule due to her confusion but the IRS said no, so the problem couldn’t be fixed.

A woman “Alice” opened an IRA annuity many years ago and hadn’t made contributions to that IRA for quite some time. In 2012, the IRA annuity came up for renewal and Alice talked to her husband “Frank” about it. She didn’t tell Frank it was an IRA annuity, she simply referred to the investment only as an annuity. Frank recommended that she close that annuity and move the money to a different investment at a different financial institution. So, she took a full distribution of the IRA annuity and opened a new, non-IRA, investment account. What she did was simply use her IRA funds to open an investment outside of an IRA which is not a tax-free IRA rollover. Other than talking to Frank, she didn’t seek financial advice from an investment professional.

At some point they realized the distribution from the IRA was fully taxable because it wasn’t rolled over to another IRA within 60 days. They went to the IRS and requested a private letter ruling for a waiver of the 60-day rollover rule due to her confusion over the difference between an annuity and an IRA annuity. Unfortunately, the IRS turned her down and did not allow her to do a late rollover; therefore her IRA distribution was taxable and her mistake could not be fixed. Alice had taken IRA money and invested it in a non-IRA account. Since she had complete control over the entire transaction, she had no one to blame but herself.

All annuities are not necessarily IRAs. An annuity is simply a type of investment, such as a CD, mutual fund, etc. When rolling over money from one IRA to another, you must buy the investment inside an IRA. Non-IRA annuities are often called “non-qualified” annuities whereas IRA annuities are called “qualified “annuities.

Whatever your IRA is invested in, if you take an IRA distribution and reinvest that money in another investment without filling out IRA paperwork, including a beneficiary form, with the receiving financial institution, then you haven’t established a new IRA and the IRA distribution is generally taxable.