If you own an annuity or cash-value life insurance policy and want to exchange it for a new annuity contract, you may wonder what the 1035 Exchange is. The 1035 Exchange allows a tax-free exchange of non-qualified deferred annuities or life insurance and a few new non-qualified annuities. Think of a 1035 annuity exchange as trading in an old car for a new one.
- What Is A 1035 Exchange?
- What is a 1035 exchange In Life Insurance?
- What Qualifies For A 1035 Exchange?
- What is a 1035 Annuity exchange?
- Things To Consider
- Maintain Deferral by Making Tax-Free Transfers
- Common Reasons To 1035 Exchange An Annuity For Another
- What is not allowed in a 1035 exchange?
- How To 1035 Exchange An Annuity For Another
- 1035 Exchange Annuity To Life Insurance
- How can I exchange my 1035 annuity or life insurance policy?
- What Annuities Can Not Be Replaced?
- 1035 Exchange At A Glance
- Next Steps
- Frequently Asked Questions
- Request A Quote
What Is A 1035 Exchange?
A 1035 exchange is a tax-free exchange of an annuity or life insurance policy for a similar type of coverage without incurring current income taxes. This allows individuals to transfer funds from one policy to another without negatively impacting their tax situation.
What is a 1035 exchange In Life Insurance?
A 1035 exchange in life insurance is a provision that allows policyholders to exchange their existing life insurance policies for other policies without being subject to current income taxes. This type of exchange is most commonly used when switching from traditional, whole-life insurance policies to permanent, universal life policies. It can also be used to switch carriers and upgrade coverage without incurring additional tax liability.
What Qualifies For A 1035 Exchange?
A 1035 exchange can replace an existing annuity or life insurance policy with a similar type of coverage. For life insurance, the policy must have been issued before the exchange, and both policies must provide death benefits. The two policies must also be of equal or more excellent value for the exchange to qualify as a 1035 exchange.
What is a 1035 Annuity exchange?
A “1035” provision under the Internal Revenue Code allows for the tax-free exchange of one annuity contract for another. This type of exchange can change the investment mix in an existing retirement plan or roll over assets from a qualified retirement plan (such as a 401k) into an annuity.
The main advantage of a 1035 annuity exchange is that it allows investors to change their investment mix without incurring any tax consequences. In addition, this type of exchange can be used to roll over assets from a qualified retirement plan into an annuity, which can provide tax-deferred growth and income during retirement.
Things To Consider
There are a few things to remember when considering a 1035 Exchange.
First, consulting with a tax advisor is essential to ensure the exchange has no adverse tax consequences.
Second, some annuity contracts may have surrender charges or other fees if the contract is exchanged for another annuity.
Finally, it is essential to compare the features and benefits of the new annuity contract with the old one to ensure it is a good fit for your investment goals and objectives.
Maintain Deferral by Making Tax-Free Transfers
An annuity’s tax-deferral advantage allows annuity holders to make tax-free transfers from one deferred annuity to another.
Saving for retirement takes time and is generally a long-term endeavor. Individuals may start saving in their twenties or thirties and continue to save until they retire at age 45 or 50 years later. It is not unusual for the consumer’s attitude about the economy to alter and their risk tolerance during this accumulation period.
A deferred annuity allows the owner to exchange their plan, whether out of a desire for greater risk tolerance, changed investment goals, or for any other reason without a taxable event.
Common Reasons To 1035 Exchange An Annuity For Another
Not all annuity products are created equal. Most annuities are underwhelming. So why are these annuities being sold in the first place? Common reasons are:
- Product limitations of the annuity broker.
- Commission-driven sales by the financial professional.
- Financial professionals lack annuity knowledge.
- The interest rate environment at the time of the annuity purchase.
- The evolution of the annuity at the time of the purchase. Consumer products are always getting better.
Reasons To Trade Your Annuity For Another
- Better upside potential
- Diverse index strategies
- Converting from accumulation to lifetime income
- Higher-income payouts than the previous annuity
- Getting out of the market (variable annuities) and obtaining principal protection
- More liquidity
- Long-term care benefits
- Lower Fees
- Inflation protection
- Shorter terms
- Enhancing a death benefit for beneficiaries
What is not allowed in a 1035 exchange?
The following items are not allowed to be exchanged in a 1035 Exchange:
- Annuities exchanged for life insurance policies
- Qualified retirement plans (such as 401ks or IRAs)
How To 1035 Exchange An Annuity For Another
Non-qualified Annuities
Non-qualified annuities can be transferred without a taxable event via 1035 Exchange. However, the exchange must happen directly between insurance companies. There is a form in the annuity application to instruct the insurance company to execute the transfer.
Qualified Annuities
IRA Annuities can be transferred without a taxable event via a Direct Transfer. However, it is preferred (not mandatory) that the transfer be made directly between insurance companies by utilizing a transfer form in the annuity application.
1035 Exchange Annuity To Life Insurance
A life insurance policy can be exchanged for an annuity under the rules of a 1035 exchange, but you cannot exchange an annuity contract for a life insurance policy. However, one can exchange 1035 an annuity for an annuity life insurance hybrid plan.
How can I exchange my 1035 annuity or life insurance policy?
Annuity providers are comfortable with replacing annuities as long as the replacement makes sense to both the consumer and the insurance company. A replacement will be considered if the following requirements are met:
- A consumer must not take a loss due to a surrender charge. However, bonus annuities can help offset the charge and be accepted for the replacement as long as there is no loss.
- The annuity owner has been in the current annuity for at least three years.
- The overall result of the replacement is a better plan for the consumer.
- Finally, the current financial profile of the annuity owner must be suitable for the new insurance company.
What Annuities Can Not Be Replaced?
- Immediate annuities
- Two-Tiered Annuities
- Any annuities that have been annuitized into payments.
1035 Exchange At A Glance
| 1035 Exchange To: | Variable Annuity | Fixed Index Annuity | Fixed Annuity | Immediate Annuity | LTC Annuity | Life Insurance |
|---|---|---|---|---|---|---|
| Variable Annuity | Yes | Yes | Yes | Yes | Yes | No |
| Fixed Index Annuity | Yes | Yes | Yes | Yes | Yes | No |
| Fixed Annuity | Yes | Yes | Yes | Yes | Yes | No |
| Immediate Annuity | No | No | No | No | No | No |
| Deferred Income Annuity | Yes | Yes | Yes | Yes | Yes | No |
| Medicaid Annuity | No | No | No | No | No | No |
| LTC Annuity | Yes | Yes | Yes | Yes | Yes | No |
| After Annuitization | No | No | No | No | No | No |
| Permanent Life Insurance | Yes | Yes | Yes | Yes | Yes | Yes |
| Term Life Insurance | No | No | No | No | No | No |
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Next Steps
Overall, a 1035 Exchange can be a helpful tool for investors who want to change their investment mix or roll over assets from a qualified retirement plan. However, it is essential to consult with a tax advisor and compare the features of the new annuity contract before making any decisions. Contact us today to learn more about this process – our team would be happy to help!
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Frequently Asked Questions
What is the difference between a rollover and a 1035 exchange?
A rollover is when you move the assets from one qualified retirement account to another. A 1035 Exchange is when you exchange a non-qualified annuity contract for another.
What is the difference between a direct and an indirect exchange?
A direct exchange is when you exchange one annuity contract for another. An indirect exchange is when you use the cash value from an existing annuity to purchase a new annuity.
What is the difference between a partial and a full exchange?
A partial exchange is when you exchange only part of an annuity contract for another. A complete exchange is when you exchange the entire annuity contract for another.
Can I do a partial 1035 exchange?
Yes, you can do a partial exchange of an annuity contract. However, consulting with a tax advisor is essential to ensure the exchange has no adverse tax consequences.
What are the benefits of doing a part exchange?
The main benefit of a partial exchange is that it allows you to change your investment mix without incurring any tax consequences. In addition, this type of exchange can be used to roll over assets from a qualified retirement plan into an annuity, which can provide tax-deferred growth and income during retirement.
What are the disadvantages of doing a part exchange?
The main disadvantage of doing a partial exchange is that some annuity contracts may have surrender charges or other fees if the contract is exchanged for another annuity.
It is also essential to compare the features and benefits of the new annuity contract with the old one to ensure that the new one is a good fit for your investment goals and objectives.
What is the cost basis on a 1035 exchange?
The cost basis of an annuity is the amount of money that has been paid into the contract. So when you do a 1035 Exchange, the cost basis of the new annuity will be the same as that of the old annuity.
Can I move my annuity to another company?
Yes, you can move your annuity to another company through portability.
How many times can you do a 1035 exchange?
There is no limit to how many times you can do a 1035 Exchange. However, consulting with a tax advisor is essential to ensure the exchange has no adverse tax consequences.
Do I have to report a 1035 exchange?
Yes, you will need to report the exchange on your tax return. However, there should be no tax consequences if the exchange is done correctly.
Can you go from annuity to life insurance?
No. You can exchange the cash value in a life insurance policy for an annuity, but you can not exchange an annuity for a life insurance policy. However, annuity-life insurance hybrid policies can assist with the exchange.
Which of the following is not an allowable 1035 exchange?
Because these are irreversible income contracts, single premium immediate Obligations (SPIAs), deferred income Obligations (DIAs), and qualified longevity assurance contracts (QLACs) are not permitted.
Is there a fee for a 1035 exchange?
Although there are no specific 1035 exchange fees, you may be charged for leaving your current annuity in the form of surrender fees. In some cases, if exchanging from one product to another within the same company, it’s possible that these fees would be waived.
Is transferring an annuity a taxable event?
If an annuity is transferred from one individual to another, the amount transferred is treated as a distribution. Therefore, the original owner would be taxed on any tax-deferred gain and may also be charged a 10% penalty. However, no taxes are triggered when an annuity contract is transferred to a new annuity.
Can you do a 1035 exchange with an inherited annuity?
Yes, you can do a 1035 exchange with an inherited annuity. However, specific rules and restrictions may apply to inherited annuities, so it is essential to consult with a tax professional or financial advisor to determine if a 1035 exchange is appropriate in your specific situation.
What are the differences between a 1031 exchange annuity and a 1035 exchange?
A 1031 exchange, under IRC Section 1031, allows for tax-deferred exchanges of like-kind investment properties, often real estate. A 1035 exchange, under IRC Section 1035, allows for tax-free exchanges of life insurance, annuity, and endowment contracts. While both offer tax benefits, they apply to different types of assets and transactions.
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