Moving From One Annuity to Another: Tax-Free “1035”
Exchanges
You can transfer funds from one annuity contract to another using
using a "1035 exchange". Section 1035 of the U.S. tax
code allows you to exchange annuity contracts without paying any
tax on the income and investment gains in your current variable
annuity account. These tax-free 1035 exchanges can be useful if
another annuity has features that you prefer, such as a larger death
benefit, different annuity payout options, or a wider selection
of investment choices.
A few basic rules apply to qualify for a tax-free 1035 exchange,
including:
- The existing annuity contract issued by one insurer must be
assigned, prior to maturity of the contract, to the insurer providing
the new contract.
- Both contracts must be payable to the same person or persons
- The cost basis of the new annuity (the initial value of the
investment, above which any earnings are considered a taxable
gain at the time of withdrawal) will generally be the same as
the cost basis of the old annuity.
You may be required to pay surrender charges on the old annuity
if you are still in the surrender charge period. And a new surrender
charge period begins when you exchange into the new annuity.
Compare both fixed annuity and variable annuity carefully. Consult your financial professional
or tax adviser to ensure the exchange will be tax free and what
fees may be incurred.
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