1035 exchange annuity can be very beneficial when it comes to planning your retirement, especially, if you are searching for a way to generate a guaranteed stream of income.
While annuities can play a vital role in executing a well-rounded estate plan, if at some point you decide you need to switch one annuity for another, you can do so without accruing any tax utilizing an annuity income tax treatment known as the 1035 exchange. Using a 1035 exchange, you’ll be able to customize your benefits on your terms, to get you closer to your goals of a tax-free retirement.
1035 Exchange Defined:
- A 1035 exchange is a legal way to exchange one insurance policy, annuity, endowment or long-term care product of like kind without triggering tax on any investment gains associated with the original contract. The IRS allows these exchanges under Section 1035 of the Internal Revenue Code.
However, this does not mean the exchange is completely tax-free. If, indeed, the annuity payments are considered taxable, then that retirement annuity tax will be deferred until your benefit payments begin. A 1035 exchange can be very useful if you decide later on down the road that the annuity you have no longer fits your retirement needs.
What are the Advantages of Using a 1035 Exchange?
The primary benefit of exercising a 1035 exchange to alter your life insurance policy or annuity choices is to defer unnecessary taxes on those transactions.
A 1035 Exchange May Be Right for You If:
- You need a completely different type of annuity
- You need more life insurance coverage than you currently have
- You want to change the type of life insurance policy you have
- You’re looking for an annuity contract with lower fees
- You want to restructure your annuity payments
How Does a 1035 Exchange Work?
If you have an annuity or life insurance policy, you could replace either one with a new annuity contract or insurance policy. In the case of an annuity, the annuitant or person receiving payments from the annuity must remain the same. However, with a life insurance exchange, while you would continue as the insured, you could alter the beneficiary on the policy.
At the time of exchange, no taxes are accrued on the investment gains associated with swapping out the contracts.
However, there are a couple of rules the IRS requires you to follow:
- When a 1035 exchange involves life insurance, it must be an even trade. This means when swapping out your old policy for a new one, you can’t simply cash out the old policy and use the money to buy a new one.
- You can exchange life insurance for life insurance or life insurance for a non-qualified annuity. However, you cannot exchange a non-qualified annuity for a life insurance policy. In addition, life insurance policies and non-qualified annuities may be exchanged for traditional and hybrid qualified long-term care products.
- In the event you were to surrender your life insurance policy, without going through a 1035 exchange, any gains associated with your original contract will be considered ordinary taxable income.
By exchanging contracts within the guidelines set by the IRS you won’t have to worry about those changes increasing your taxes. However, in some cases, to trade one annuity contract or life insurance policy for another, you may be required to pay a surrender charge. The team at Tennessee Annuity Rates can help you navigate this exchange and confirm it is the best option for you.
- A surrender charge is a penalty fee for canceling your contract with the original insurance company or annuity provider. Surrender Charges can be billed as a flat fee or as a percentage of the amount paid into the contract. These fees vary by company in terms of how much they are and when you will have to pay them.
- If you’re exchanging policies or contracts within the same company, It’s possible that the company may waive any surrender charges. However, if you are moving your policy or contract to a brand-new company, you will want to factor in the surrender charge as part of the exchange process or confirm you are out of surrender.
What Should You Consider Before Initiating a 1035 Exchange?
Before considering any life insurance exchange, ask your agent these questions:
- Will my current health status affect my ability to qualify for a new policy?
- Will my premiums increase based on my current age or health?
- Will a new policy offer a better death benefit or additional features, such as accelerated death benefit or long-term care riders?
- What is the waiting period for the new policy before death benefits can be paid?
- Are there any outstanding loans on the policy that would need to be repaid before an exchange can be made?
Before considering an annuity exchange, ask your agent these questions:
- Will a new annuity be more cost-effective in terms of lower fees?
- Will the structure of my annuity payments change?
- Does a new annuity offer the potential for better investment returns?
- Does an annuity still fit my estate and retirement planning needs?
- Will I pay a surrender fee to exchange annuities?
**It is crucial, when exchanging life insurance or annuities that you remain the owner of the policy or contract. If the ownership should change, the 1035 exchange tax rules no longer apply.
The good news is that the team at Tennessee Annuity Rates is here to help. We can help you not only shop your options but give you suggestions on what are the best options to match your needs. Contact us today.