When to Make a 1035 Exchange

Have you made an investment in an annuity and are now having second thoughts? Is your annuity not giving you a great rate of interest? Or has your financial situation changed since you invested in an annuity? With time often the financial priorities of individuals change, with this also comes a time to rethink their investment portfolio. There are several reasons why people want to get out of their annuity but the consequences may be quite drastic. If you are less than 59 ½ years of age then 10% penalty on the taxable part of the annuity is forfeited to the IRS. Surrender charges may be quite high if it hasn't been long since you bought the annuity. Also when you withdraw from an annuity the money is taxed like ordinary income. However there is a way to avoid most of these penalties: a 1035 exchange.

What is a 1035 Exchange?

A 1035 exchange offers investors a chance to make a tax free transfer between like accounts. This means that you can switch from one annuity to another, shift from a life insurance policy to another and from a life insurance policy to an annuity without paying tax for the transfer or on the investment. The change has to be to an investment of equal or greater value. The 1035 exchange gets its name from the section of the tax code that allows investors the opportunity to exchange annuities and life insurance policies without having to bear tax liabilities.

When to Make a 1035 Exchange?

A 1035 exchange should be considered when:

The invested annuity is giving a much lower rate of interest than other annuities.
The terms and conditions of the annuity are not as favorable as the ones offered by other annuities.
The investor's financial condition has changed and he or she may not be able to make the required payments towards the annuity.
The investor may wish to consolidate investments in more than one annuity into one.
The investor may wish to change from a variable annuity to a more secure annuity such as the fixed annuity or the equity-indexed annuity.
The investor may wish to retire earlier than expected and wish to change from the existing annuity to an immediate annuity. This may be especially so for a deferred annuity or an equity indexed annuity.

It is important that the investor consider a 1035 exchange after due thought and consideration as this process should not be taken lightly. It is crucial that an annuity broker be consulted so that he or she is able to provide appropriate advice and guidance. Aspects such as if any penalty or surrender charge may be applicable due to the 1035 exchange are important and an independent financial advisor will be able to provide all the required information and advise accordingly.

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