Retirement Literacy Foundation · Annuity Education

1035 Exchange: How to Move an Annuity Without Paying Tax

By Hans Goldstein, founder, Retirement Literacy Foundation · Updated October 8, 2026

Short answer: A section 1035 exchange lets you swap one annuity for another, or a life insurance policy for an annuity, without paying tax on the gain. Your cost basis carries over to the new contract and tax stays deferred. It has to be a direct transfer between insurance companies, and some directions are not allowed.

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What can be exchanged

Annuity to annuity: allowed.
Life insurance to annuity: allowed.
Life insurance to life insurance: allowed.
Annuity or life insurance to a qualified long-term care contract: allowed since 2010.
Annuity to life insurance: not allowed tax-free.

The owner generally has to be the same on both contracts. Money is sent insurer to insurer; if a check is made out to you, it is a taxable withdrawal, not an exchange.

Partial exchanges and the 180-day rule

You can move only part of an annuity into a new one. Under IRS Revenue Procedure 2011-38, a partial exchange keeps its tax-free treatment as long as you do not take a withdrawal from either contract (or surrender either) within 180 days of the transfer, other than annuity payments for life or a set period of 10 years or more.

What to check before exchanging

Surrender charges on the old contract, and a new surrender period that usually starts on the new one. See surrender charges.
Benefits you would give up: an enhanced death benefit, an income rider with a built-up value, or an old contract's guaranteed minimum rate.
Pre-1982 money. Contracts funded before August 14, 1982 have older, friendlier withdrawal tax rules, and an exchange can keep that treatment for the old money if done correctly.
Who benefits. A replacement usually pays a new commission. Most states require a replacement form that compares the old and new contracts. Read it.

How it is reported

The old insurer issues a Form 1099-R with a code showing a tax-free exchange, and the new insurer records your carried-over basis. Keep both records; the basis matters when you eventually take money out. See how annuities are taxed.

Common questions

Is a 1035 exchange taxable?

No, if it is a qualifying exchange done as a direct transfer between insurers. Any cash you receive in the process (boot) is taxable to the extent of the gain.

Can I 1035 exchange an annuity into life insurance?

No. An annuity can only be exchanged tax-free into another annuity or a qualified long-term care contract.

Is there a limit on how often I can do a 1035 exchange?

There is no federal limit, but each new contract usually starts a new surrender period, and frequent replacements can cost you in surrender charges and lost benefits.

More on annuities: How Do Annuities Work? A Plain-English Guide · How Are Annuities Taxed? · Inherited Annuity Taxes · Annuities in an IRA · Annuity Surrender Charges and How to Get Out of an Annuity · Types of Annuities and Their Pros and Cons · What Is a MYGA? Multi-Year Guaranteed Annuities Explained · Fixed Index Annuity Explained · Immediate Annuity (SPIA) Explained · Variable Annuity Explained · Annuity vs CD

Education only; nothing is sold here and no product is recommended. Hans Goldstein, founder of the Retirement Literacy Foundation, is also a licensed California insurance producer (#4273294). Tax rules depend on your situation; check with a tax professional before acting.