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fixed annuities

What Is a Tax-Free 1035 Exchange?

Categories: Annuity Education, Annuity Strategies, Finance

Are you interested in upgrading your annuity to one with better features and/or a higher interest rate? In most cases, the IRS allows what is known as a 1035 exchange of non-qualified annuity contracts between insurance companies. A 1035 exchange lets you switch companies while continuing to defer taxes, ensuring that your annuity stays up-to-date with the latest advantages and benefits available to you.

Please watch this short video that provides additional insight and details you may find helpful:

Section 1035 is one of the few parts of the tax code that actually works in your favor. For example, when you sell shares of stock to buy shares of a different company, the profits on your investment are subject to taxes. By contrast, utilizing a 1035 exchange allows you to exchange one non-qualified annuity contract for another, with the accumulated interest earnings from your original policy remaining tax-deferred until, at a future date, you permanently withdraw the funds from your new annuity. A non-qualified annuity is one that is funded with money not associated with a tax qualified retirement account, such as an IRA or 401k plan.

Generally, when not utilizing 1035 exchange rules, the surrender of an existing insurance contract is a taxable event since the contract owner must recognize any gain from the old contract as current income. However, under IRC Section 1035, when annuity contracts are 1035 exchanged for a new contract from a different insurance company, the transfer is considered nontaxable, provided certain requirements are met.

The full text of the law, as well as a direct link, is provided below. For the purposes of this article, we are primarily focused on item, “(a) (3) an annuity contract for an annuity contract.”

U.S. Code > Title 26 > Subtitle A > Chapter 1 > Subchapter O > Part III > Section 1035

(a) GENERAL RULES – No gain or loss shall be recognized on the exchange of—

(1) a contract of life insurance for another contract of life insurance or for an endowment or annuity contract or for a qualified long-term care insurance contract;
(2) a contract of endowment insurance (A) for another contract of endowment insurance which provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged, or (B) for an annuity contract, or (C) for a qualified long-term care insurance contract;
(3) an annuity contract for an annuity contract or for a qualified long-term care insurance contract; or
(4) a qualified long-term care insurance contract for a qualified long-term care insurance contract.

AnnuityAdvantage offers a free 1035 exchange evaluation service to all annuity owners, whether or not they are current customers. With this service, an AnnuityAdvantage specialist examines your existing annuity to let you know how it compares to newer products on the market. There is never any obligation or pressure, and the decision to move forward with any recommendation is always left to you.

All 1035 exchanges require serious consideration. Only after careful examination of available alternatives can you decide if a 1035 exchange makes sense for your individual situation. To get your free 1035 exchange evaluation, just give us a call; we look forward to being helpful.