Common Terms and Definitions
Transfer Company: Once a fund (CD, IRA, Mutual Fund) has matured at its current investment
Carrier: The Insurance Company the application is being written with. Aviva is a carrier as is Allianz, Great American, American Equity, etc…
Non-ACAT: A transfer of funds that is initiated manually through
Transfer Paperwork: The paperwork needed to transfer funds from one carrier to the other, there can be multiple transfers coming into one policy (multiple sets of transfer paperwork).
Annuitant: The individual whose age and life expectancy are used to calculate the
Owner: The individual who has control over the policy and receives payments from an annuity plan under the terms of that plan.
Joint Annuitant: A person named in an annuity contract in addition to the owner/annuitant. This person’s age and life expectancy are used along with those of the annuitant to calculate the
Joint Owner: An individual who co-owns an annuity contract with another person. Both have the right to make and approve decisions relating to the contract. Most carriers require both owners to approve all changes, etc.
Surrender Charges: A penalty imposed by the insurer if the contract owner terminates the annuity prematurely, by withdrawing all or a portion of funds.
1035 Exchange: A tax-free transfer of a non-qualified annuity contract from one insurer to another. Although a 1035 transfer is tax-free, it might be accompanied by a surrender charge if surrender fees have yet to lapse.
Beneficiary: The individual or legal entity receiving an annuity death benefit when the annuitant designated in the contract dies (Typically a child or spouse). The beneficiary cannot manage the annuity – a right reserved solely for the contract owner.
Free-Look: The provision in an annuity contract stating that the owner of the contract has between 10 and 20 days to review the contract immediately after buying it. It gives the buyer the chance to return the contract to the insurer for a total refund and is governed by state regulations, which may vary.
Account qualification types
ANNUITIES are classified into two distinct tax qualification types, Qualified or Non-Qualified. The general distinction between the two relates to whether a tax advantage exists with the premium source funding the contract.
NON-QUALIFIED contracts are funded with dollars which have already been taxed. These dollars are not initially tax advantaged. Since annuities are a tax-deferred financial product, it is the
QUALIFIED contracts are generally funded with pre-tax dollars. These dollars come into an account with an automatic tax advantage since tax isn’t usually assessed on these monies until a future date when distributions are taken. Since annuities are tax-deferred products it may seem redundant to establish tax-advantaged funds into an annuity contract. They do however offer certain features and/or benefits which make them attractive to a consumer.
Qualified annuities are funded by rollovers or transfers from an
Roth IRAs, funded with after-tax dollars, are also sometimes referred to as qualified contracts. Roth IRAs have their own special tax rules, more fully described below.
Common types of qualified accounts
TRADITIONAL IRA – This is a personal savings plan known as an individual retirement account. An IRA plan gives tax advantages for saving for retirement. Contributions to a traditional IRA may be
ROTH IRA – A Roth IRA is also a personal savings plan but operates somewhat in reverse compared to a traditional IRA. For instance, contributions to a Roth IRA are not tax-deductible while contributions to a traditional IRA may be deductible. However, while distributions (including earnings) from a traditional IRA must usually be included in income, certain qualifying distributions (including earnings) from a Roth IRA are not included in income. A Roth IRA can be established at the same types of financial institutions as a traditional IRA. Required minimum distributions (RMDs) are not required from a ROTH IRA during the account owner’s lifetime.
SEP IRA – This is an account for self-employed individuals or small business owners which may be established. SEP is short for Simplified Employee Pension. This plan type allows business owners a simplified method to contribute towards their employees’ retirement as well as their own retirement savings. The plan must be offered to all employees, who are at least 21 years of age, employed by the employer for 3 of the last 5 years, and had
SIMPLE IRA – This is an account for small business employers of 100 or fewer employees which may be established through employee salary reductions and employer non-elective or matching contributions. SIMPLE stands for Savings Investment Match Plan for Employees. This plan type allows business owners to offer a retirement plan with minimal paperwork requirements. The plan must be offered to all employees who have
Common types of qualified plan accounts
Defined Contribution Plans – is a retirement plan in which the employee and/or the employer contribute to the employee’s individual account under the plan. The amount in the account at distribution includes the contributions and investment gains or losses, minus any investment and administrative fees. Generally, the contributions and earnings are not taxed until distribution. The value of the account will change based on contributions and the value and performance of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans and profit-sharing plans.
Typically only a triggering event such as separation from service, age-based in-service withdrawal (attainment of age 59 ½), or termination of the plan allows for distributions to the participant or rollover out of the plan to an IRA.
Defined Benefit Plans – This plan type provides a fixed, pre-established benefit for employees at retirement. It is also known as a traditional pension plan, and it usually promises the participant a specified monthly benefit at retirement. Often, the benefit is based on factors such as the participant’s salary, age and the number of years he or she worked for the employer. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service. Generally, a defined benefit plan does not allow for in-service distributions to a participant before age 62.
Tax Exempt and Government Entity Plans
403(b) Tax-Sheltered Annuity (TSA) Plan – This is a retirement plan offered by public schools and certain tax-exempt organizations. An individual’s 403(b) annuity can be obtained only under an employer’s TSA plan. Generally, these annuities are funded by elective deferrals made under salary reduction agreements and non-elective employer contributions.
Typically only a triggering event such as separation from service, age-based in-service withdrawal (attainment of age 59 ½), or termination of the plan allows for rollover out of the plan to an IRA.
457 (b) Plan – This is a plan of deferred compensation described in IRC section 457 are available for certain state and local governments and non-governmental entities
Typically only a triggering event such as separation from service, age-based in-service withdrawal (attainment of age 59 ½), or termination of the plan allows for a distribution from the plan to the participant. Only governmental 457(b) plan distributions are eligible for rollover to an IRA.
DEFERRED ANNUITY – A policy or contract purchased through an insurance company that is designed to secure steady cash flow for an individual during their retirement years. The policy owner is taxed only when distributions are taken from the account. All annuities are tax-deferred, meaning that the earnings from investments in these accounts grow tax-deferred until withdrawn. Earnings also remain tax-deferred. Fixed annuities guarantee a certain payment amount and are
LIFE INSURANCE – A policy or contract purchased through an insurance company. In exchange for premiums (payments), the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries in the event of the insured’s death. The death
STOCK – A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. The two main types of stock are COMMON and PREFERRED. Common stock entitles the owner to vote at shareholders’ meetings and to receive dividends. Preferred stock generally has no voting rights, but has a higher claim on the corporation’s assets and earnings than a common shareholder.
BOND – A bond
MUTUAL FUND – An investment vehicle (security) that is made up of a pool of funds collected from mutual investors for investing. Each fund is made up of shares of stocks, bonds, money market instruments etc…..which is operated by money managers who invest to produce the objective or style specific to each mutual fund.
CERTIFICATE OF DEPOSIT – A CD/savings certificate/time deposit entitles the bearer to receive interest. CDs have a maturity date, a specified fixed interest rate and can be issued in most any denomination. They are generally issued by commercial banks and are insured by FDIC for a period ranging from a term of 1 month to 5 years.
Transfers & Rollovers
There are only two types of transfers, qualified and non-qualified transfers. They are broken down by the tax qualification.
QUALIFIED TRANSFERS are inclusive of tax-advantaged fund and are reflective of Direct Rollover, Direct Transfer, and Indirect Rollover.
Direct Rollover is always from a qualified employer-sponsored plan to another qualified employer-sponsored plan or IRA. The owner never takes constructive receipt and funds are always sent
Direct Transfer is always qualified to
Indirect Rollover is the instance of moving a qualified account to another qualified account, within the 60 day period allowed by the IRC. An account owner requests a distribution from a qualified account, takes constructive receipt of the proceeds, and provided the funds are re-established into a new qualified account within a period of 60 days, the distribution is free of any tax consequence. There are common potential issues that arise when indirect rollovers are used:
- If the funds are coming from an employer-sponsored plan, the employer is generally required to withhold 20% of the distribution to send to the IRS as a tax deposit. That fact makes a complete rollover harder for some taxpayers to achieve.
- Only one indirect rollover from IRA to IRA is allowed in a 12-month period.
- Indirect rollovers are not generally available with regard to inherited IRAs or other qualified accounts.
NON-QUALIFIED TRANSFERS are inclusive any non-tax advantaged money and are reflective of Section 1035 Exchange, Partial Section 1035 Exchange, and Taxable Transfers.
Section 1035 Exchange is the IRC tax code which states you may move funds directly from an annuity or cash value life insurance contract to another like type of annuity or long term care policy free of any tax consequence. You may NOT move from annuity to
Partial Section 1035 Exchange is the same as Section 1035 exchange. These exchanges are generally allowed between annuities only. Not every nonqualified deferred annuity company will allow a partial 1035 exchange of its product. If it does allow a partial exchange, then the funds will be split on a proportionate basis between basis and gain to the new contract. Special rules are in place that
Taxable Transfer is the transfer between any other non-tax advantaged accounts. This means any non-qualified account, where tax consequences aren’t from the transfer. If an account is liquidated and interest is applied it will be reportable, thus the term taxable transfer.