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Joe Diamond, CPA, CFP®, EA, MST

 

Diamond Financial Corporation

4256 North Arlington Heights Road, Suite 204

Arlington Heights, IL 60004

 

Phone: 847-884-8500 

 

Email: customerservice@diamondfinancial.com

Website: www.diamondfinancial.com

July/August 2020

What's an Annuity Exchange?

Whats an Annuity Exchange

When you surrender an annuity* or cash value life insurance policy, you may face taxes and penalties unless you exchange it in a tax-approved way. That way is a 1035 Exchange, named after a section of the Internal Revenue Code. If you are considering such an exchange, understand the consequences first before making any decision.


Why Exchange?
Why would you want to exchange an annuity? You may prefer to buy one from a financially stronger company, an important point because annuities are not FDIC-insured. Or you may find one that has a higher initial interest rate.


You could, however, run up against a few obstacles trying to make an exchange. One, you will be older and your premiums could be higher because of it. Two, you could pay more or even be denied coverage because of an adverse change in health. Three, it takes more time to make a 1035 exchange than simply surrendering the policy, but the tax savings may make it worth your while.


1035 Benefits
This section of the tax code allows you to move earned interest from one annuity to another without incurring taxes or early withdrawal penalties. You’ll still need to check with your annuity issuer to see if surrender charges, which can be significant, come into play.


If surrender charges are an issue, you may be able to make a partial exchange that’s surrender-fee-free. If you exchange policies issued by the same insurer, you also may not have to deal with surrender charges. Talk to an insurance professional to learn more.


* An annuity may impose charges, including but not limited to surrender charges, mortality and expense risk charges, administrative fees, underlying fund expenses, and feature charges that can reduce the value of your account and the return on your investment. You will have to pay federal income tax on any earnings you withdraw from the annuity during retirement or before. Payments and guarantees are subject to the claims-paying ability of the issuing insurance company and the underlying investment options are subject to market risk and may lose value.


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Advisory Services offered through Diamond Financial Corporation, Registered Investment Advisor. Custodial Services provided by TD Ameritrade. Member FINRA/SIPC/MSRB.
Tax Preparation provided by Diamond Financial Corporation.
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