What exactly is a 1035 exchange?
Asked by: Mary Jacobi | Last update: January 19, 2026Score: 5/5 (38 votes)
What qualifies as a 1035 exchange?
Section 1035 of the Internal Revenue Code allows for the non-taxable exchange of certain insurance products. Allowable exchanges include a life insurance policy to an annuity, an annuity to an annuity, an endowment to an endowment, and a life insurance policy to a life insurance policy.
What are the disadvantages of a 1035 exchange?
What Are Possible Disadvantages of a 1035 Exchange? These are some disadvantages of a 1035 exchange: Exchanging policies may trigger surrender charges, which reduce the value transferred to the new contract. The new policy often starts a new surrender charge schedule, so carefully read the terms of your contract.
What is the IRS approved 1035 transfer rule?
A 1035 exchange is a provision in the tax code which allows you, as a policyholder, to transfer funds from a life insurance, endowment or annuity to a new policy, without having to pay taxes.
Do I have to report a 1035 exchange on my tax return?
However, a 1035 exchange is not a taxable event. All such 1035 exchanges are reportable and the distribution code of '6' on the tax form indicates to the IRS it was a tax-free 1035 exchange. What is the tax cost basis of my annuity contract?
Finance: What is a 1035 Exchange?
What is the 6 month rule for 1035 exchange?
In other words, if the proceeds from a partial exchange were used by the second insurance company to set up a multiyear guaranteed deferred annuity or a fixed index annuity, then no withdrawal should be taken from the new contract for at least 6 months (instead of 12 months under the old law).
Which of the following is not an allowable 1035 exchange?
A whole life insurance policy exchanged for a term insurance policy is not an allowable 1035 exchange.
What is not permitted in a 1035 tax-free exchange?
Section 1035 does not allow tax-free movement of funds from annuities to life insurance. The 1035 exchange rule does allow you to move from life insurance to an annuity. Under Section 1035, you can transfer cash value life insurance into an annuity and it's a nontaxable event.
What is the difference between a replacement and a 1035 exchange?
A transaction in which a new insurance or annuity contract is to be purchased using all or a portion of the proceeds of an existing life insurance or annuity contract is referred to as a "replacement." Although the term "1035 Exchange" is often used to describe any form of replacement activity, technically not all ...
How long does it take to do a 1035 exchange?
The 1035 exchange process can take anywhere from 1-3 weeks, so it's always best to make sure you're aware of the 30 day window and your options so that you're ready to act towards the beginning of the window in order to ensure it is completed by the end of the window.
Is there a fee for a 1035 exchange?
Fidelity does not charge a fee for facilitating a 1035 exchange. Taxes are not incurred when exchanging from one tax-deferred annuity to another (as long as the exchange is in compliance with section 1035 of the Internal Revenue Code).
Which of the following would not be a legitimate reason to do a 1035 exchange?
Final answer: An invalid exchange under Section 1035 would be exchanging an annuity contract for a life insurance policy, as this does not meet the like-kind exchange requirement set forth by the tax code.
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 nonqualified annuity contract for another.
Is a 1035 exchange a good idea?
Key takeaways
A 1035 exchange can be beneficial if you're looking to take advantage of the features of a newer policy but don't want to pay additional taxes to make a trade. Before making an exchange, it's important to work with an advisor to review both policies and make sure the exchange is a good fit for you.
Can you transfer a life insurance policy to another company?
It's possible. But the replacement of a policy from one company with a policy from a different company is regulated, so you'll want to work with an insurance agent to make sure the process goes smoothly and according to the rules.
How many times can you do a 1035 exchange?
The 1035 Exchange
Under Section 1035 of the Internal Revenue Code, the IRS will allow the exchange of one annuity for another income tax-free. There is no limit on the number of old variable annuity contracts that can be exchanged for new contracts.
What is the IRS 1035 rule?
The legislative history of § 1035 explains that § 1035 provides non-recognition treatment for taxpayers who have "merely exchanged an [annuity contract] for another better suited to their needs and who have not actually realized gain." H. Rep. 1337, 83d Cong., 2d Sess. 81 (1954).
Can I convert my life insurance to an annuity?
Using what is called a 1035 exchange, it is possible to convert the cash value of a life insurance policy to an annuity, without having to pay taxes. However, there are a lot of factors and potential expenses to consider, so it's best to speak with an agent or other financial professional before taking any action.
What is the 180 day rule for a 1035 exchange?
01 A transfer that is within the scope of this revenue procedure will be treated as a tax-free exchange under § 1035 if no amount, other than an amount received as an annuity for a period of 10 years or more or during one or more lives, is received under either the original contract or the new contract during the 180 ...
What is the 1035 boot rule?
Boot is generally defined as any value from an old contract that is not transferred to a new contract. Boot is taxable to the client to the extent that there was gain in the old contract. Boot in a 1035 transaction includes: >Any outstanding loans that are not repaid and are not mirrored in the new contract. >
What qualifies for a tax-free exchange?
The main requirements for a 1031 exchange are: (1) must purchase another “like-kind” investment property; (2) replacement property must be of equal or greater value; (3) must invest all of the proceeds from the sale (cannot receive any “boot”); (4) must be the same title holder and taxpayer; (5) must identify new ...
Why would someone 1035 exchange their existing policy?
The primary advantage of using a 1035 exchange to change your life insurance policy or annuity choices is to avoid triggering taxes on those transactions.
What does not qualify for 1035 exchange?
The annuities that cannot be exchanged are known as "irrevocable annuities." These types of products do not qualify for 1035 exchanges. Irrevocable annuities include income annuities like longevity and immediate annuities.
Do I have to report a 1035 exchange?
Even though you don't pay an income tax on any gains, you typically still need to report a 1035 exchange when filing your taxes, using form 1099-R.
Why would a client want to comply with section 1035?
Section 1035 is a provision of the Internal Revenue Code (IRC) allowing for a tax-free exchange of an existing annuity contract, life insurance policy, or endowment for a different policy or contract of like kind that better addresses a client's changing needs.