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Tax-Free
1035 Exchanges
Section 1035 of the U.S. tax code allows you to exchange
an existing variable annuity contract for a new annuity
contract without paying any tax on the income and investment
gains in your current variable annuity account. These
tax-free exchanges, known as 1035 exchanges, can
be useful if another annuity has features that you prefer,
such as a larger death benefit, different annuity payout
options, or a wider selection of investment choices.
You may, however, be required to pay surrender charges
on the old annuity if you are still in the surrender charge
period. In addition, a new surrender charge period generally
begins when you exchange into the new annuity. This means
that, for a significant number of years (as many as 10
years), you typically will have to pay a surrender charge
(which can be as high as 9% of your purchase payments)
if you withdraw funds from the new annuity. Further, the
new annuity may have higher annual fees and charges than
the old annuity, which will reduce your returns.
Caution!
If you are thinking about a 1035 exchange, you
should compare both annuities carefully. Unless you plan
to hold the new annuity for a significant amount of time,
you may be better off keeping the old annuity because
the new annuity typically will impose a new surrender
charge period. Also, if you decide to do a 1035 exchange,
you should talk to your financial professional or tax
adviser to make sure the exchange will be tax-free. If
you surrender the old annuity for cash and then buy a
new annuity, you will have to pay tax on the surrender.
http://www.sec.gov/investor/pubs/varannty.htm
• Structured Settlement Factoring
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