Taxes & Fees
Couples can save money by trading other assets rather than splitting annuities. However, tax laws offer protections for minimizing liability.
The IRS allows certain exemptions for owner transfers related to divorce. Couples moving the annuity from one spouse to another don’t face added tax liability for the transfer. In other words, the IRS treats divorce as a non-taxable event.
The tax-free portion of the annuity remains tax-free. Either party accepting future payments still owes income tax on distributions.
If one spouse accepts an early distribution from an annuity as part of a divorce settlement, then the IRS requires income tax on earnings and charges an early withdrawal penalty. When the owner of a policy changes the asset to an entirely different, new annuity, known as a 1035 exchange, they do not owe added taxes. For the 1035 exemption to apply, the transfer must meet certain stipulations.
Notes on Transfer or Split Scenarios:
- Transferring or splitting an annuity may initiate a new surrender period, as defined by the insurance company, which means the time table for higher interest on withdrawals is reset.
- Individual annuity contracts put limitations on what transfers in the case of a divorce. Most contracts do not allow transfers of living benefits or added riders.