A 1035 exchange is a tax code provision that lets you move the entire value of an annuity contract, including any gains, into a new annuity without owing tax on the transfer. The same rule allows a life insurance policy to be exchanged into an annuity.
How the transfer actually moves
Your current insurance company sends the money straight to the new carrier. You never take possession of the funds yourself, so the IRS does not count the swap as a withdrawal, and there is no tax bill the year it happens. The gains inside the old contract simply carry over into the new one.
A few rules apply no matter which carriers are involved:
- The same person must own the contract, and the same person must be the annuitant, both before and after the exchange.
- The types have to match up: annuity value can move into a new annuity, and a life insurance contract's value can move into an annuity, but the reverse never works. An annuity cannot become a life insurance policy this way.
- Any surrender charge still owed on the contract you are leaving does not disappear just because the exchange is tax-free. Check the schedule before you move.
When people actually use one
The most common trigger is a MYGA reaching the end of its guaranteed term. Rather than let the money roll into whatever renewal rate the carrier declares, you shop the market, pick a new contract, and move the balance across with a 1035 exchange instead of cashing out and reporting the gain as income. This is also the mechanic behind annuity laddering, where each rung gets exchanged into a fresh term as it matures.
One distinction trips people up: funding a new contract with dollars pulled from an IRA is a different animal entirely, since nothing was owned in annuity or policy form beforehand. That path is called an IRA rollover, and it runs on its own set of rules. Our fixed annuity IRA rollover guide walks through how that version works.
In short: a 1035 exchange lets you replace an annuity contract, or convert life insurance into an annuity, without the swap creating a tax event. It is the standard route for reinvesting money once a contract matures.
Frequently asked questions
What does a 1035 exchange mean?
It is a provision in Section 1035 of the tax code that lets you transfer the value of an annuity into a new annuity contract, or turn a life insurance policy into an annuity, without the IRS treating the move as a taxable event.
How does the 1035 exchange process work?
The old carrier sends your money directly to the new one. Because you never receive the funds personally, there is no withdrawal to report and no tax due at the time of the transfer.
When is a 1035 exchange the right move?
The typical case is a maturing MYGA. Instead of accepting the renewal rate your current carrier offers, you compare rates across companies and move your balance into the strongest option without giving up any of your accumulated gain to taxes.
Written and reviewed by
James Forren Warren
Licensed Retirement Income Strategist · License #20551202
James Forren Warren is a licensed Retirement Income Strategist with Tax Free Wealth Plan. For the past five years he has helped individuals and families turn their savings into retirement income they can count on. He writes and reviews the annuity research on this site and keeps it plain: what a product does, what it costs you, and who it actually fits.
Educational only, not investment, tax or legal advice. Tax Free Wealth Plan LLC is a licensed insurance agency, not a registered investment adviser or broker-dealer. Annuities are not bank deposits, are not FDIC insured and are not guaranteed by any government agency. Guarantees are backed solely by the claims-paying ability of the issuing insurance company. Features, rates and availability vary by state and change over time; the contract and disclosure documents govern.