What is a 1035 Exchange?

An annuity is a great savings plan option that provides you excellent returns along with tax benefits. There are various types of annuities that one can select from according to their financial situation and needs. This versatility is one of main reasons why people prefer to invest in annuities. However sometimes after buying an annuity the investor may find that it is not exactly what he or she needed or that their financial condition and requirements have changed. Have you bought an annuity and now are having second thoughts? Are you worried about the tax liabilities involved in surrendering the annuity? Have your financial requirements changed and not matching the conditions of the annuity? Then a 1035 exchange is an excellent option for you.

What is a 1035 Exchange?

The 1035 exchange refers to the Section 1035 of the tax code that allows tax-free exchange between annuities, life insurance policies and life insurance policy to annuity. That means that if you are dissatisfied with your current annuity you can exchange it for one with a higher rate of interest or better conditions. As long as specific guidelines are met there will be no tax liabilities associated with this transfer.

Advantages of a 1035 Exchange

For various reasons such as a change in financial situation of investors lead to the desire to change their current annuity investment. The 1035 exchange allows them to do it without attracting any tax.
If an investor had simply cashed out of the annuity he would bear a lot of loss. If you were under 59 ½ years of age a 10% penalty on the taxable part of the annuity would be levied. Furthermore on ‘fully loaded’ investments the surrender charge in the first year would be about 7% and would reduce with every year. Even no-load or low-load annuities are known to have smaller surrender charges. In case of a 1035 exchange the investor can select a better investment vehicle and shift to it without any tax liabilities or incurring any major losses.
The 1035 exchange provides investors the convenience of changing their investment portfolio in a smooth manner rather than having to opt out of an annuity and again start the process of buy another.
The money from the annuity would be treated as normal income and taxed as such. The 1035 exchange avoids the need to pay tax on the invested amount of money.

While a 1035 exchange is beneficial to the investors it is vital that they keep several things in mind when making the exchange. To begin with it is wise to consult an annuity broker, an independent financial advisor, who can help assess your changing financial needs and requirements so that you invest in an annuity that provides you the returns and conditions that you desire. Your annuity broker will not only provide you the latest information about the various offers by insurance companies but will also help you decide on an annuity that would suit you the best. For instance if you are considering taking early retirement you could consider exchanging your annuity for an immediate one that shall begin income payments virtually as soon as the investment is made.

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