Changing Your Annuity—The Section 1035 Exchange

Choosing an annuity isn’t easy. You’ll have to weigh up the benefits and costs of fixed and variable rate annuities, and qualified and non-qualified annuities. You’ll then have to choose a contract that you hope will deliver the highest returns.

Of course, you might get it wrong. You could choose a variable rate annuity from a reputable insurance company that you expect will grow at a rate of 5 percent a year. In fact, during the years following your purchase you see its value drop by 3 percent a year. The performance of funds can change. Past performance isn’t a guarantee of future success.

But annuities and other retirement funds are meant to be long-term. There are penalties for early withdrawals. Does that mean that having chosen a badly-performing fund you’re stuck with it for the rest of your life?

The answer, fortunately, is no.

It is possible to move funds from one account to another using a Section 1035 Exchange. This is a special provision in the tax code. It allows you to withdraw funds from one retirement account and place them in another retirement account without triggering a tax event or a withdrawal penalty.

Section 1035 exchange is powerful but has limits. (Due)

Limits of a 1035 Exchange

There is a catch though. You can only move the funds between similar accounts. You can’t move your savings from a non-qualified annuity to a qualified annuity, for example. Money in a variable rate annuity can’t move to a fixed rate annuity. Your retirement savings can only leave a fund that’s performing poorly or has high fees into a similar fund that should give you better returns.

You might also have to pay surrender charges. They can be quite steep, especially in the first years of an annuity. They often start around eight percent then fall during each year of the annuity. So you could buy an immediate, fixed-rate annuity for $100,000 then find that you needed to take the money back after a year. The surrender charges could cost as much $8,000—more than the annuity would have given you over the course of that year.

The Good News

The good news is that if you’re moving funds within the same insurance company, the company will often waive the surrender fee. It’s another issue that you need to check, though, before you make your decision.

The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.