What is 1035 Exchange?
A 1035 exchange is a tax-free transfer of funds from one annuity contract to another, or from a life insurance policy to an annuity. Named after Section 1035 of the Internal Revenue Code, this provision allows you to move your full balance, including all accumulated gains, to a new contract without triggering a taxable event.
How a 1035 Exchange Works
When your MYGA or fixed annuity matures, you can transfer the entire value to a new annuity with a different carrier. The money moves directly from insurer to insurer. You never take constructive receipt of the funds, so no taxes are due at the time of transfer.
Important rules:
- The contract owner and annuitant must remain the same on the new contract
- The exchange must be between like products (annuity to annuity, or life insurance to annuity)
- You cannot exchange an annuity into a life insurance policy
- If your current contract has surrender charges, they still apply
When To Use a 1035 Exchange
The most common use is at the end of a MYGA guarantee period. Instead of accepting the insurer’s lower renewal rate, you shop for the best current rate and transfer tax-free. This is also how annuity laddering works in practice.
If you are funding a new annuity with money from an IRA rather than an existing annuity or life insurance policy, that is an IRA rollover, not a 1035 exchange. See our IRA fixed annuity rollover guide for how that process works.
