Posted by ABLE Tax Resolution

Important Things To Keep in Mind When having a 1035 Annuity Exchange

Important Things To Keep in Mind When having a 1035 Annuity Exchange

An annuity is simply the process of using funds from an old annuity to buy another annuity. It is usually classified as a 1035 exchange if you use only non-qualified funds. If you, however, use qualified funds, the annuity will be under the rules binding the IRA within the annuity.

A 1035 exchange provides a preferable alternative for people to swap a former annuity for a fresh one. The aim is to have a different goal and a better rate. The process still maintains the tax-deferred status of your annuity.

While not all annuity contracts qualify for exchange, one usually can exchange the majority of the annuities in the market even partially. Here are the annuities that cannot be transferred:

  • Income annuities
  • Immediate and longevity annuities
  • Annuities without cash values, etc. 

If you have already subscribed to a 1035 exchange or you are considering one, here are essential factors that should guide you:

Be in Contact With Your Insurer for the rate

If your annuity comes with an interest rate, your insurer is in the best position to tell you what the rate is. Not only this, they can advise you if there is a possibility for future change. This is important as it could position you for a better deal when you exchange for a new annuity.

Know Your Surrender Schedule

Most fixed annuity does come with a surrender schedule, which spans the investment term in the contract. Fixed index annuity also comes with a surrender schedule, which does span between 7 to 15years. You will have a hefty penalty to face if you exchange a penalty that is in the surrender period.

The penalty fee is highest in the first year and decreases over the year. If you want to have a 1035 exchange, one of the things your insurer wants to know is that you will have a higher income after the penalty.

Know Vital Policy Details

Should you decide to go for the 1035 exchange process, vital details from your former annuity must be available for your new insurer. This is vital for them to withdraw from your existing annuity. Some essential policy data they do request are: 

  • Insurer’s name
  • Policy/Contract Number
  • Product type
  • Cost basis
  • Purchase date
  • Owners and joint owners
  • Surrender charge
  • Cash value 

It could seem like an overwhelming task to gather all those info. However, many of the requested info is in your policy document.

You Can Change Your Insurance Agent

It is not compulsory to pledge your allegiance to a single insurance agent, especially when having a 1035 exchange. With your 1035 exchange, you can build a new relationship with a new agency. In fact, it is good to explore what the marketplace has for you by exploring the market options. This will help you get the best deal available. 

Know the Main Goal of the product You are After 

As long as the product you are after offers liquidity, you can exchange your annuity for any other. However, the best way to go about this is to know what you want and go for a product that suits this purpose.

  • If your goal, for instance, is guaranteed income, consider going for an immediate annuity or longevity annuity as an exchange for your old contract. Then it would be best if you compared this with the guaranteed income you will get from the income rider with your existing product.
  • If your goal is guaranteed growth, you should try and exchange a fixed annuity. Also, you should be after a higher guaranteed interest rate, better than your present policy
  • If you are after potential market for upside, then try to swap a variable annuity or a fixed index annuity. Before deciding, be sure to compare the guaranteed interest rates, cap, fees and participation rates for the new and your old policy

This list can hold your hands in making sure you know what you want and that you also get the right thing. This comes in handy if you have an annuity that is almost expiring or you wish to make an annuity purchase.

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