Common Terms and Definitions

Transfer Company: Once a fund (CD, IRA, Mutual Fund) has matured at its current investment vehicle such as Edward Jones, a bank or another carrier a customer can “rollover” or TRANSFER the funds from that company to the insurance company/carrier that will issue the annuity.

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 paperwork; not electronically (ACAT). These transactions require the customer to liquidate their holdings to a cash position and a check is sent to the new company.

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 amount of annuity payments.

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 amount of annuity payments.

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.

Single Premium Immediate Annuity (SPIA): An annuity that may be funded only at issue, and provides periodic payouts (monthly, quarterly, or annually) at the cost of compound interest. Future investments require a new annuity purchase.

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 basis, or initial investment in a contract from which the measure for gain is calculated. Generally speaking, any taxable withdrawal from a non-qualified annuity contract taken prior to 59 ½ is subject to the 10% early withdrawal penalty. Some exceptions apply.

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 employer sponsored qualified plan, or via way of direct contributions to a specific kind of qualified annuity such as a Traditional IRA, SEP IRA, SIMPLE IRA or Section 403(b) annuity. The Internal Revenue code sets the maximum contribution limits for each tax year. Generally speaking, a withdrawal from a tax qualified annuity contract taken prior to 59 ½ is subject to the 10% early withdrawal penalty. This penalty is imposed by the IRC and would apply to all amounts distributed from the contract.

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 tax deductible either in whole or in part. Also, the earnings on the amounts in a traditional IRA are not taxed until they are distributed. The portion of the contributions that was tax deductible also does not get taxed until distributed. A traditional IRA can be established at many different financial institutions, including banks, insurance companies and brokerage firms. Distributions made prior to age 59 ½, are subject to an early withdrawal penalty of 10%, although some exceptions exist. The RBD (required beginning date) for IRAs is April 1 of the year following the calendar year in which the account owner turns age 70 ½. Once the RBD is met, required minimum distributions (RMDs) must begin and continue for each subsequent year thereafter while an account balance exists.

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 compensation of at least $600 in the current calendar year. Only the employer contributes and the amount may be up to 25% of compensation but not more than a designated amount ($53,000 for the 2015 tax year). Deposits to a SEP are made into the employee’s SEP IRA.


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 compensation of at least $5,000 in any prior two years and are reasonably expected to earn at least $5,000 in the current year. Employers can choose less restrictive participation requirements if they like. Deposits to a SIMPLE plan are made into the employee’s SIMPLE IRA.

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 tax exempt under IRC 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f).

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.

Financial Products

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 relatively safe, low-yielding financial product. When distributions are taken, they are subject to ordinary income tax rates. Taxable early distributions are usually subject to an extra 10 percent penalty tax.

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 benefit of a life insurance policy is usually income tax free.

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 by contrast is also a type of security that represents a debt or loan to the organization such as a corporation or municipality.

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.

At maturity date a grace period applies at which time the owner can liquidate or move the account free of any withdrawal penalty. When withdrawn prior to this period, early withdrawal penalties such as loss of interest usually apply.

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 from one custodian to the next.

Direct Transfer is always qualified to qualified, but the tax qualification type is the same, meaning IRA to IRA by example. The owner never takes constructive receipt and funds are always sent direct from one custodian to the next. There is no tax consequence and the financial product type is of no matter.

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 life. In order to properly effect and exchange, both the Owner and Annuitant or Insured must be the same on the previous and new contract (known as like to like). The account owner must never take constructive receipt or the distribution becomes immediately taxable. Provided the exchange is properly executed it is free from any tax consequence and the cost basis and gain in the contract are carried over to the new contract.

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 say if a distribution is taken from either contract for a period of 180 days after the exchange, the exchange may not remain tax free.

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.