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Guide

1035 exchanges

A 1035 exchange is the IRS-approved method for moving from one annuity to another without triggering taxes on your gains. Here's how it works, what qualifies, and what to watch out for.

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01

What is a 1035 exchange?

Named after Section 1035 of the Internal Revenue Code, a 1035 exchange allows you to transfer the value of an existing annuity directly to a new annuity contract without triggering a taxable event.

  • The transfer must be direct — carrier-to-carrier. If you receive the funds personally, even momentarily, the IRS treats it as a taxable distribution.
  • Your cost basis (original investment) carries over from the old contract to the new one.
  • A 1035 exchange preserves your tax-deferred status but does NOT eliminate surrender charges on the existing contract.

A tax strategy, not a fee dodge

A 1035 exchange prevents a taxable event but does not prevent surrender charges, market value adjustments, or the loss of existing benefits on the old contract.

02

What qualifies for a 1035 exchange?

Annuity → Another annuityQualifies
Life insurance → AnnuityQualifies
Annuity → Qualified LTCI contractQualifies
Annuity → Life insurance policyNo

The exchange must involve the same owner. You cannot 1035 exchange your annuity into a contract owned by someone else. Both qualified (IRA) and non-qualified annuities can be exchanged.

03

Full vs. partial 1035 exchanges

Full 1035 exchange

  • Entire value transferred to the new contract
  • Old contract is terminated
  • New contract receives full accumulated value minus surrender charges
  • Cost basis carries over in full

Partial 1035 exchange

  • A portion transferred; old contract remains in force
  • Tax-free under IRS Rev. Proc. 2011-38
  • No withdrawals from either contract within 180 days of transfer
  • Cost basis allocated proportionally
04

The 1035 exchange process, step by step

01

Review your current contract

Identify your accumulation value, surrender charges, benefit base, riders, and death benefit. Understand what you'll lose by exchanging.

02

Select the replacement product

Compare rates, fees, features, and carrier strength. Ensure the new product delivers a genuine improvement.

03

Complete the new application

Apply for the new annuity. The application will include a section indicating this is a 1035 exchange.

04

Sign the exchange paperwork

The new carrier provides 1035 exchange forms. Sign and submit to the new carrier, who initiates the transfer with the old carrier.

05

Direct transfer occurs

The old carrier liquidates your contract and sends proceeds directly to the new carrier. You never touch the money.

06

New contract is issued

The new carrier issues your contract with the transferred value as the initial premium. Your basis carries over.

07

Tax documentation

The old carrier issues Form 1099-R with distribution code 6 (tax-free 1035 exchange). The new carrier issues Form 5498.

05

Common 1035 exchange scenarios

Variable Annuity → Fixed Indexed Annuity

One of the most popular exchanges. Reduces annual fees from 2.5–3.5% to 0–1.25%, adds principal protection, and may add an income rider with guaranteed lifetime income.

Old FIA → New FIA with better rates

If your surrender period has ended and your current FIA's renewal rates are uncompetitive, exchanging to an FIA with higher caps or better participation rates can significantly improve your position.

MYGA at maturity → New MYGA or FIA

When your MYGA matures and the auto-renewal rate is lower than today's new-money rates, a 1035 exchange locks in the current higher-rate environment without triggering taxes.

Any deferred annuity → SPIA for immediate income

If you need income now, exchanging a deferred annuity into a SPIA via 1035 converts your accumulated value into immediate guaranteed lifetime income — tax-free on the exchange itself.
06

Important rules and warnings

The 180-day rule

For partial 1035 exchanges, no withdrawals from either contract within 180 days of the transfer, or the exchange may be reclassified as taxable.

Surrender charges still apply

The 1035 exchange does not waive surrender charges on the old contract. Calculate the net transfer amount after charges.

New surrender period

The new contract will have its own surrender schedule. You are committing to a new lock-up period.

Rider values do not transfer

Benefit bases, income riders, death benefits, and other contract-specific features stay with the old contract. They do not carry over.

Free-look period

Most states provide 10–30 days to cancel the new contract for a full refund after a 1035 exchange. Use this period to review carefully.
07

Frequently asked questions

Does a 1035 exchange trigger a tax event?
No, provided the transfer is direct (carrier-to-carrier) and involves qualifying contracts. You will receive a 1099-R with code 6 showing $0 taxable amount.
Can I do a 1035 exchange while still in a surrender period?
Yes, but you'll pay the surrender charge on the old contract. The net amount after the charge is what transfers to the new contract.
How long does a 1035 exchange take?
Typically 2–6 weeks from submission of paperwork to issuance of the new contract. During the transfer, your money is not earning interest in either contract.
Can I exchange a qualified (IRA) annuity?
Qualified annuities are typically moved via a trustee-to-trustee transfer rather than a 1035 exchange, but the practical effect is the same: a direct, tax-free transfer to a new contract.
08

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