The Simple Explanation
A 1035 exchange is a tax-free transfer from one annuity to another. Named after Section 1035 of IRS code, it lets you switch products without triggering taxes. Without it, surrendering would mean paying taxes on all gains that year.
NHow It Works
1. Decide to move to new annuity. 2. Request 1035 exchange — new company handles paperwork. Money goes direct, you never take possession. 3. Basis carries over. 4. Taxes remain deferred.
Important Rules
• Direct transfer only — if you receive check, it's not a 1035
• Same owner required
• Surrender charges still apply
• New surrender period begins
• Partial exchanges possible but more complex
When Exchange Makes Sense
• Current annuity has high fees and you're past surrender
• Better rates availables
• Needs have changed (accumulation → income or vice versa)
• Want to consolidate multiple contract
When Exchange Doesn't Make Sense
• Trading into worse product (commission-driven)
• Surrender charges make math unfavorable
• Resetting timeline unnecessarily
• Losing valuable guarantees that no longer exist in market