Annuity transfer

[Old skier]

We closed out an annuity from company A that originally were purchased with after tax funds. Our intention was to buy a new Annuity with Company B. Company A sent us a check for the full amount of the closed Annuity in two separate checks. We deposited the checks in our savings account and sent two separate bank issued checks for the full amount of the proceeds ( Gross Distribution) from the Company A  Annuity  to Company B for the new Annuity.  We received a 1099R from Company A with a taxable amount (approximately half of the Gross Distribution, Box 1) shown in Box2a.

Since we just transferred all of the Gross Distribution of the Annuity from Company A to a new Annuity with company B and did not use any of the funds for other uses and the time of the transfer of funds from Company A to Company B was within 5 business days there should not be a tax implication.  How do we handle this?

[dmertz]

"we just transferred all of the Gross Distribution of the Annuity from Company A to a new Annuity with company B"

No, this was not a transfer of one annuity to another.  The surrender of the annuity as Company A and the purchase of the annuity at Company B were performed as entirely independent transactions.  The amount in box 2a of the Form 1099-R from Company A is indeed taxable income that must be added to your AGI.  The entire amount paid for the annuity at Company B is investment in the contract at Company B.  The amount of time that passed between these transactions is entirely irrelevant.

"the time of the transfer of funds from Company A to Company B was within 5 business days there should not be a tax implication."

There is no such rule with regard to these transactions.

To be a transfer of one annuity to another, it would have to have been done as a so-called "1035 exchange."  Such a transfer is required to have been made directly between the annuities with no funds paid to you.  That did not happen.

[Old skier]

Thanks  dmertz;

This is the answer that I have received from a few sources.

I see that when planning to make the transfers, we did not ask enough questions to get at the problem of what are called "custodial transfers" covered by the 1035. 

It looks like I have to accept that we made a bad error in the transfers. I hope others reading this and planning transfers of any type ask a lot of questions first.

v/r

Old Skier