1035 Exchange Checklist
A 1035 exchange moves one annuity into another without triggering current tax on the gain. It does not waive surrender charges, and it forfeits riders attached to the existing contract. This free checklist walks through the eight facts an owner should have in hand before any exchange is discussed, and shows which ones are still missing. It is educational only and is not a recommendation.
- 01
Do you know the exact surrender charge that would apply today?
A 1035 exchange does not waive a surrender charge. The charge comes out of the amount transferred, so it is the first number to establish.
- 02
Have you identified every rider attached to the contract and what it costs?
Income, death benefit, and enhanced withdrawal riders are forfeited when a contract is exchanged. A rider bought years ago may carry terms that are no longer offered.
- 03
Do you know the current benefit base as well as the account value?
On many contracts the benefit base used to calculate income is higher than the surrender value. Only the account value transfers in an exchange.
- 04
Have you checked whether a market value adjustment applies?
An MVA can raise or lower the amount payable depending on how rates have moved since issue. It applies in addition to any surrender charge.
- 05
Do you know the surrender schedule on the contract being proposed?
An exchange normally restarts a new surrender period. Trading four remaining years for a fresh ten is a real cost even when no charge is visible today.
- 06
If a bonus is being offered, do you know how it vests?
Premium bonuses are frequently paid into a benefit base rather than the account value, and often vest over the full surrender period. The headline number and the accessible number can differ substantially.
- 07
Have you compared the financial strength ratings of both carriers?
An annuity is backed by the issuing carrier's claims-paying ability. Ratings from A.M. Best, S&P, Moody's, and Fitch are published and free to check.
- 08
Can you state, in one sentence, what the exchange is meant to fix?
A clear objective — more income at a set age, lower cost, a different guarantee — makes an exchange evaluable. Without one, there is nothing to measure the proposal against.
0/8 answered. Nothing is flagged as unknown from your answers so far.
Illustrative estimate only — not a recommendation to exchange, surrender, buy, or sell any annuity, and not tax advice. A 1035 exchange does not waive surrender charges or market value adjustments, and riders are generally forfeited. Read the contract and speak with a licensed professional before acting.
What a 1035 exchange does and does not do
The provision is narrow. It preserves tax deferral on the gain when one annuity is exchanged directly for another, and it carries the original cost basis into the new contract. It says nothing about the economics of the two contracts, which is where the actual decision lives.
| It does | It does not |
|---|---|
| Defer tax on the gain | Waive surrender charges |
| Carry over the original cost basis | Waive a market value adjustment |
| Move funds directly between carriers | Preserve riders or benefit base credits |
| Allow a change of carrier or product type | Reset or shorten a new surrender schedule |
Related reading: how surrender charges work, market value adjustments, and the surrender charge estimator.
Frequently asked questions
- What is a 1035 exchange?
- Section 1035 of the Internal Revenue Code allows the tax-free exchange of one annuity contract for another, or of a life insurance policy for an annuity, without triggering current tax on the gain. The funds move directly between carriers; taking a cheque personally can make the transaction taxable.
- Does a 1035 exchange avoid surrender charges?
- No. The tax code addresses taxation only. Any surrender charge or market value adjustment in the existing contract still applies and reduces the amount that transfers to the new contract.
- What is usually lost in an exchange?
- Riders, benefit base credits, vested bonus amounts, and the progress already made through the existing surrender schedule. Older contracts sometimes carry guaranteed minimum rates or rider terms that are no longer available on new products.
- When can an exchange make sense?
- It can make sense when the existing contract's surrender period has ended, when no rider of value is attached, when costs are materially higher than comparable current contracts, or when the objective has genuinely changed. Whether it makes sense for you is a question for a licensed professional reviewing your actual contract.
- Is a partial 1035 exchange possible?
- Partial exchanges are permitted under IRS guidance but carry conditions, including rules on withdrawals taken within a set period after the exchange. They are more complex than full exchanges and should be reviewed with a tax professional.
- Does this checklist tell me whether to exchange?
- No. It produces a readiness reading based on how much you currently know about your own contract. It is educational only and is not a recommendation to buy, sell, surrender, or exchange any annuity.
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