There are actually several items to consider before you exchange an annuity. A 1035 annuity exchange is a rule under Section 1035 of the Internal Revenue Code that allows for a tax-free exchange of annuities or life insurance policies.

If you purchase an annuity and later determine that a different one is better for your needs, canceling, or surrendering, can be costly – especially if the annuity is still within its surrender charge period.

On top of that, if you are not yet age 59 ½, you may incur an additional 10% early withdrawal from the IRS – and this is on top of any of the taxes that you might owe on the taxable gain. So, unfortunately, it is possible that you may only end up with half (or less) of your original contribution back to put towards a different annuity that serves your needs much better.

Enter the 1035 exchange!

How an Annuity Exchange Works

A direct annuity exchange – also known as a 1035 exchange – allows you to avoid the tax consequences that could otherwise be incurred if you cancel one annuity contract and then purchase another.

The primary steps in an annuity exchange include the following:

  • You “trade” your current annuity for an annuity that is more suited to your needs
  • The original purchase price of the annuity that is being exchanged will carry over to the new annuity contract

It may also be possible for you to exchange multiple annuity contracts for one single contract, and vice versa (exchange one annuity for several). In addition, people who inherit annuities may also qualify for a 1035 exchange – provided that they follow all of the other rules for inherited annuities.

What to Consider Before Moving Forward with Exchanging an Annuity

Before you exchange an annuity, there are several important factors to consider, such as:

  • Taxes you will incur
  • Who the annuity owner is (because the person who holds the annuity contract cannot change with the new annuity)
  • Penalties (including a surrender penalty from the insurance company and/or an IRS 10% early withdrawal penalty if you’re under the age of 59 ½)
  • Financial stability of the insurance company offering the new annuity
  • What you are primarily using the annuity for (i.e., tax-deferred savings, retirement income, etc.)
  • The surrender period on the new annuity
  • Whether the annuities are qualified (purchased with pre-tax money) or non-qualified (purchased with after-tax funds), because a qualified annuity may not be exchanged for a non-qualified annuity, and vice versa
  • Time frame until retirement (especially if you plan to convert the annuity into an income stream then)

Do You Currently Have the Best Annuity in Place for Your Financial Needs?

If you own an annuity, but it is no longer meeting your current and/or anticipated future needs, it can help to compare it to other annuities that are available in the marketplace today. That way, you can better determine whether or not an annuity exchange makes sense for you.

At Annuity Gator, you can find out all you need to know about how annuities work, and what to do if you plan to move forward with a 1035 annuity exchange. So, feel free to contact us and chat with one of our annuity experts.

You can reach us by calling (888) 440-2468 or by sending us an email with any questions that you have through our secure online contact form. We look forward to helping you get your financial and retirement plan on track with your specific needs and goals.

Items to consider before you exchange an annuity