Use the 1035 Tax Free Exchange To Maximize Your Annuity Benefits

Use the IRS 1035 tax-free exchange to obtain higher yields

Make sure you earn the most from your annuity, use the IRS code 1035 (tax-free)) to obtain a higher yield. Section 1035 (a) of the Internal Revenue Code, a 1035 Exchange is the exchange of one insurance policy (life or annuity) for a newer policy with no tax liability. Section 1035 allows owners of annuities (and life insurance) the opportunity to exchange an older annuity contract for a more modern contract that may offer features more in line with current needs. As an example, the older contract may be crediting a lower interest rate than a new annuity may offer.

If retirement income is desired: A situation could exist when income is desired by exchanging the old contract for a new contract which contains an income rider.  Many companies offer many different options and making sure the end benefit meets your desired goals is essential.

The original tax basis is transferred to the new contract. Adjusted tax basis in an insurance contract is the sum of deposits made or the total of all premiums paid. A 1035 Exchange is allowed providing certain conditions are met. Both the old and new contracts must be held by the same policy owner, and only certain types of contracts can be exchanged such as cash value life insurance policies and annuity contracts. An old life insurance policy can be exchanged for a new life insurance policy or an annuity, but an annuity can only be exchanged for another annuity, never a life insurance policy.

Section 1035 also allows policy owners to exchange two or more (combine) old contracts for one new contract, as long as the contracts belong to the same owner. Section 1035 also allows for the partial transfer from one policy to another however many companies may choose not to comply.

The rules surrounding 1035 Exchanges can be complex, and consultation with a tax professional is recommended.