What Is a Tax-Free 1035 Exchange?

What Is a Tax-Free 1035 Exchange?

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 This is allowed in order to replace outdated contracts with new ones that may provide lower fees and better benefits.

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.