A client has an existing variable annuity and wishes to reallocate the assets within their subaccounts to better align with their current market outlook. Which of the following statements is TRUE regarding this action?
- AThere are usually no limitations on the number of reallocations a client can make within a year.
- BThe client can typically reallocate assets between subaccounts without incurring immediate taxes.
- CReallocations within subaccounts are considered new contributions and are subject to sales charges.
- DReallocations between subaccounts are subject to federal income tax on any gains.
Show answer & explanationAnswer & explanation
Correct answer: B. The client can typically reallocate assets between subaccounts without incurring immediate taxes.
One of the key features of variable annuities is the ability to reallocate assets between subaccounts without triggering an immediate taxable event. The tax deferral applies to the growth within the annuity, even when moving funds between investment options. There may be limitations on the number of free reallocations, and they are not considered new contributions subject to sales charges.
Why the other options are wrong
- A. While many annuities offer a certain number of free transfers, there are often limitations (e.g., 12 free transfers per year) before fees apply.
- C. Reallocations are internal transfers of existing funds, not new contributions, and are not subject to new sales charges.
- D. Reallocations within a variable annuity are typically tax-free transfers, not subject to immediate federal income tax.
Variable Annuity Subaccount Reallocation
Clients can reallocate assets between subaccounts within a variable annuity on a tax-deferred basis, meaning no immediate taxes are incurred on gains during such transfers.
- Tax-deferred transfers between subaccounts.
- Not a taxable event.
- May have limits on free transfers per year.
- Not considered new contributions or subject to new sales charges.
Memory trick: Switching subaccounts in an annuity is like moving money in a tax-free box.