What Is a Tax-Free 1035 Exchange?


Quick Answer

A tax-free Section 1035 exchange is the replacement of a life insurance policy or an annuity with a new policy or annuity without incurring taxes, explains Investopedia. This is allowed in order to replace outdated contracts with new ones that may provide lower fees and better benefits.

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Full Answer

The IRS allows: the replacing of one annuity contract for another with identical annuitants; the replacement of one life insurance policy, annuity contract or endowment policy for another life insurance policy, annuity contract or endowment policy; or the replacing of one endowment policy for an identical endowment policy or an annuity contract, says Investopedia. Any other variations of exchanges are not considered tax-free.

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