Changing Your Annuity—The Section 1035 Exchange

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.