Section 1035 Exchange - Policy Loans

[Guest samcder]

I have two 403B accounts. One with Great American Life Insurance Corporation and one with Travelers Insurance. Under my account with GALIC,I took a loan to purchase a house. Can I transfer the loan and assets in my GALIC account to Travelers in accordance with Section 1035 Exchange? I am not happy with GALIC and they have refused to execute such a transfer.

[Michael Devault]

Transfers from one 403(B) account to another are performed under the authority of Revenue Ruling 90-24, not IRC section 1035. Rev. Rul. 90-24 is "permissive," meaning that while you're allowed to make transfers, product vendors are not required by law to participate in the transfer.

Transfers of 403(B) accounts with loans have an added layer of difficulty. Unless you are 59-1/2 or separated from service, income tax regulations prohibit the product vendor from reducing your account balance in order to pay off the loan. Some companies use this as an excuse not to make transfers. This is compounded by the fact that most vendors cannot establish a new 403(B) account with an existing loan (inflexible computer systems generally is the reason why they won't).

An idea to consider is to pay off the existing loan, make the transfer, then take out a new loan with the new vendor. First, check to make sure the existing company will make the transfer if you re-pay the loan.

If that idea doesn't work, see if they will make a partial transfer of the account balance that is not securing the loan. It's not a complete solution to the problem, but it may give you some relief.

Hope this helps. Good luck.

[GBurns]

Are you sure that it was GALIC that refused the transfer or was it the agent?

What were the reasons given for refusing the transfer?

Almost every one of the dozens of claims that there was a refusal to transfer that I see are either mis-statements by the agent (usually fearing loss of commission) or a mis-understanding of advice given against the transfer. Very rarely is it ever a refusal by the Company.