A 1035 exchange (named after Section 1035 of the Internal Revenue Code) allows you to replace one annuity with another without paying taxes on the accumulated gains. This powerful provision enables you to upgrade to a better contract without losing the tax advantages you've built up.
How 1035 exchanges work:
1. You request an exchange to a new annuity contract
2. The old insurance company sends funds directly to the new company
3. You never receive the money personally
4. Your cost basis (original investment) transfers to the new contract
5. No taxes are due at the time of exchange
1035 exchange requirements:
- Must be like-kind exchange (annuity to annuity)
- Funds must transfer directly between insurance companies
- Same owner and annuitant on new contract
- Cannot take constructive receipt of funds
What can be exchanged via 1035:
- Annuity to annuity ✓
- Life insurance to annuity ✓
- Life insurance to life insurance ✓
- Annuity to life insurance ✗ (not allowed)
Important considerations:
- Old contract surrender charges still apply
- New contract surrender period starts fresh
- May be worthwhile despite charges if new contract is significantly better
- Partial 1035 exchanges allowed in some cases
When to consider a 1035 exchange:
- Current contract has poor performance or high fees
- Better products available in the market
- Need different features (income rider, LTC rider)
- Current surrender period has ended
For Ocala residents with older annuities, a 1035 exchange may allow you to upgrade to a modern contract with better features while preserving your tax-deferred status.
Official Government Sources
Get Personalized Annuity Guidance
Tell us a bit about yourself and a local specialist will reach out to help.