What Is a 1035 Exchange? Tax-Free Annuity Transfers

The Basics

A 1035 exchange (named after the IRS code section) allows you to transfer one annuity contract to another, or one life insurance policy to another, without paying taxes on the gains. It's like a rollover for annuities.

This is especially useful if you're stuck in an old annuity with high fees, poor performance, or unfavorable terms. You can move to a better product without creating a taxable event.

What Qualifies for a 1035 Exchange?

Annuity to annuity: Yes. Life insurance to annuity: Yes. Life insurance to life insurance: Yes. Annuity to life insurance: No (this direction doesn't qualify). The new contract must have the same owner and annuitant/insured as the old one.

When a 1035 Exchange Makes Sense

You're in a variable annuity with high fees (2-3% annually) and want to move to a lower-cost fixed annuity. Your current annuity has poor cap rates or crediting methods. Your surrender period has ended and better products are available. You want to add an income rider that your current contract doesn't offer.

Watch Out For

Surrender charges on your old contract still apply — a 1035 exchange doesn't waive them. Make sure your surrender period is over (or close to it) before exchanging. Also, some new contracts may start a new surrender period. We help clients evaluate whether the benefits of exchanging outweigh the costs.