how does cancelling annuity during free look affect rollover
I have a client who did a rollover on thier IRA and put the money into variable annuities. They are within the 10 day free look and want to cancel the annuities under the free look provision. If the annuity company sends the money back to them in the form of a check and they are still within the original 60 day free look period, will they still be exempted from paying the tax. What we are looking to do is put the money into a fixed annuity with a different company and I believe the company holding the funds will only send the money back to the client as opposed to doing a direct transfer.
Permalink Submitted by Alan Spross on Mon, 2009-02-09 21:00
Unfortuneately, the only relief allowed to the one rollover rule is an FDIC mandated return of funds. I would think a Dept of Insurance mandated return would also get a positive letter ruling in the event an insuror was siezed by a state authority.
In addition, the many allowed exceptions to the 60 day rollover period would not affect the one rollover rule because the one rollover limit is measured from the distribution date, not the date of the completed rollover.
I am sure that institutions that do not offer direct transfers are well aware of the how this rule can result in captive clients who first deposited the funds by rollover rather than transfer. Accordingly, in many cases the free look is only good for non qualified assets.
There may be a work around to this problem, if he wants to jump through some hoops. The 12 month waiting period does not apply to conversions, so he could request a return of funds and then convert them to a Roth IRA. Taking this one step further, if the conversion is recharacterized, I have not heard of the IRS looking through the process and taxing the recharacterization for violation of the one rollover rule. So there’s the workaround if the client is badly wants to escape the annuity IRA.