Everything to Know about a 1035 Exchange

A 1035 exchange is a provision to the tax code that allows you to transfer funds from a life insurance policy or variable annuity to another policy or annuity. All of this is can be done without creating an event in which you are taxed additional money.

Is It Beneficial?

While there are not many parts of the tax code that work in the favor of the taxpayer, the 1035 exchange does. With an annuity, you can exchange what you currently have for another with the original earnings staying tax deferred until you withdrawal the money for good.

Beware the Surrender Charge

You may not have to pay taxes when you complete a 1035 exchange, but there is a very good chance that you will be hit with a surrender charge. This is a charge that you must pay when you sell or take money from an annuity during the surrender period. The surrender period usually lasts anywhere from six to eight years, starting after you complete the transaction.

A 1035 exchange is beneficial because it does not set off a taxable event. If you can avoid a surrender charge, this transaction is even more advantageous.

What are the requirements for a 1035 exchange?

One of the primary requirements that comes with a 1035 exchange is that the owner of the old product and the new product has to be the same individual. If you want to change the ownership of the new policy over to someone else, you can do so, but you have to wait for the transfer to be completed first. In order to do a 1035 exchange, you have to be working with a life insurance policy, an annuity or an endowment. You are also allowed to exchange two old products for one single new contract.