Can You Transfer an Annuity to a CD?

Annuities and Certificates of Deposit (CDs) serve distinct financial purposes, leading to frequent questions about moving funds between them. An annuity is a contract, often with an insurance company, designed to provide a steady income stream, typically during retirement. It involves investing a sum of money and receiving regular payments over a specified period or for life. A Certificate of Deposit, on the other hand, is a type of savings account that holds a fixed amount of money for a fixed period of time, in exchange for which the issuing bank pays interest.

A direct transfer from an annuity to a CD is generally not possible due to their fundamental structural and regulatory differences. Annuities are insurance products, while CDs are banking products. Moving funds from an annuity to a CD requires first liquidating or surrendering the annuity to access its cash value. Once accessible, these funds can then be used to purchase a CD. This process involves specific steps and financial considerations.

Understanding Annuity Liquidation

Accessing annuity funds for a Certificate of Deposit necessitates liquidating or surrendering the contract. This converts the annuity’s value into cash. Two primary methods exist: a full surrender or a partial withdrawal. Both options require contacting the annuity provider and completing specific documentation.

A full surrender involves terminating the entire annuity contract and receiving its remaining cash value. To initiate a full surrender, obtain and complete a surrender request form from your annuity provider or financial advisor. This form requires your annuity contract number, personal identification, and often a Medallion Signature Guarantee to verify identity. Submit the completed form, along with any other requested documentation, to the annuity company for processing.

Alternatively, a partial withdrawal allows you to take out a portion of your annuity’s value while keeping the contract active. Annuity contracts often include provisions for “free withdrawals,” permitting a certain percentage of the contract value (e.g., 10% or 15%) annually without surrender charges. To request a partial withdrawal, complete a partial withdrawal request form, available from your provider or advisor. This form asks for the specific amount, desired payment method, and tax withholding preferences.

Forms and procedures for full surrenders and partial withdrawals vary among providers and contract terms. Contact your annuity provider or a financial advisor who understands your contract details. They can provide forms, outline requirements, and guide you through completing documentation. Gathering required information, such as your contract number, personal identification, and banking details, before beginning can streamline liquidation.

Navigating Tax and Penalty Implications

Liquidating an annuity carries tax and penalty implications that can reduce the net amount available for CD investment. Understand these consequences before proceeding. Earnings accumulated within the annuity are subject to ordinary income tax upon withdrawal. The amount received above your original principal investment is taxable at your regular income tax rate. For example, if you invested $50,000 and your annuity grew to $70,000, the $20,000 gain would be considered taxable income.

Withdrawals before age 59½ may be subject to a 10% early withdrawal penalty imposed by the IRS. This penalty applies to the taxable portion, unless an exception applies. Common exceptions include withdrawals due to the annuitant’s death, disability, or a series of substantially equal periodic payments (SEPP). Other exceptions can include withdrawals for unreimbursed medical expenses exceeding a certain percentage of adjusted gross income.

Annuity providers may also impose surrender charges for early withdrawals. These charges are a percentage of the amount withdrawn or contract value, often decreasing over a specified period (e.g., seven to ten years) before expiring. For instance, a contract might impose a 7% surrender charge in the first year, declining by 1% each year thereafter. These charges are deducted directly from the withdrawal, further reducing available funds.

These tax obligations and penalties collectively impact the net proceeds from liquidating your annuity. Factor in these deductions when determining the actual amount to invest in a CD. The annuity provider will issue a Form 1099-R detailing the distribution for tax reporting.

Purchasing a Certificate of Deposit

Once annuity funds are liquidated and available, the next step is purchasing a Certificate of Deposit. Opening a CD account is straightforward, offered by various financial institutions. You can purchase CDs from commercial banks, credit unions, and some brokerage firms.

CDs come in several forms, including traditional fixed-rate CDs, which offer a set interest rate for a specific term. Other variations exist, such as callable CDs (allowing early redemption by the issuer) and step-up CDs (where the interest rate increases at predetermined intervals). Regardless of type, CDs require a fixed sum deposit for a fixed period (a few months to several years) in exchange for interest payments.

To open a CD account, provide standard personal identification and financial information. This includes a government-issued photo identification (e.g., driver’s license or passport) and your Social Security or Taxpayer Identification Number. The financial institution will also require proof of your current address, such as a utility bill or bank statement.

Funding your new CD account involves transferring cash proceeds from your annuity liquidation. This can be done through electronic transfer from a checking or savings account, a wire transfer, or by depositing a cashier’s check. The institution will provide specific funding instructions, ensuring your money is securely deposited.