From 24/7 Wall St. · Vilma Rios · · 1m 10s
Section 1035 Annuity Swap Tax Rule
Retirees can swap annuities tax-free but face surrender charges on old contracts.
In brief
Retirees can swap annuities tax-free but face surrender charges on old contracts. Retirees can exchange annuities without federal tax bills but pay surrender charges on old contracts. Originally reported by 24/7 Wall St..
Section 1035 Rule
A 1954 tax rule lets retirees swap annuities without federal income tax bills.
Surrender Charge Cost
Retirees face a $10,000 surrender charge on old contracts when switching annuities.
Tax Break Savings
Section 1035 saves $8,800 in taxes versus cashing out a $40,000 gain.
Bonus Pitch
Agents offer a 4% bonus credit but still leave a $2,400 shortfall after switching.
Surrender Charge Timeline
Surrender charges drop from 7% to 3% over time, reaching zero after seven years.
FINRA Rule 2330
Brokers must check if customers have exchanged annuities within the past 36 months.
Consumer Warning
Insurance salespeople have strong financial incentives to recommend unsuitable annuities.
Four Rules for Tax-Free Swaps
Never take possession of money, keep owner and annuitant the same, wait 180 days after partial exchange, and check Form 1099-R.
In short
Retirees can exchange annuities without federal tax bills but pay surrender charges on old contracts.
