Updated October 2026 by Kevin Edwards, California-licensed annuity agent (License #0D42517).
A 1035 exchange lets you move money from one annuity or life insurance contract into another without paying tax on the gain, as long as the move follows Section 1035 of the tax code. Answer three questions below to see whether your swap qualifies, then read what to check before you move anything.
Check your exchange
1. What do you own now?
2. What do you want to move into?
3. Will the owner (and the insured or annuitant) stay the same?
This checker covers the basic federal eligibility rules only. It isn’t tax advice and doesn’t tell you whether an exchange is right for you.
Which 1035 exchanges are allowed?
Section 1035 only works in certain directions. The rule of thumb: you can move toward income or long-term care coverage, but you can’t move from an annuity back into life insurance.
| From ↓ / To → | Annuity | Life insurance | Qualified long-term care |
|---|---|---|---|
| Annuity | ✓ Allowed | ✕ Not allowed | ✓ Allowed |
| Life insurance | ✓ Allowed | ✓ Allowed | ✓ Allowed |
| Endowment | ✓ Allowed | ✕ Not allowed | ✓ Allowed |
| Qualified long-term care | ✕ Not allowed | ✕ Not allowed | ✓ Allowed |
If you exchange an annuity into long-term care coverage, the annuity must be non-qualified (not inside an IRA) and the new policy must be tax-qualified long-term care insurance. Exchanges into long-term care became allowed in 2010 under the Pension Protection Act of 2006.
Allowed doesn’t mean it’s a good idea
Surrender charges still apply
The tax break doesn’t waive your current carrier’s surrender charge. Check your contract’s surrender schedule before you start.
A new surrender period starts
Most new annuities begin a fresh surrender period. Make sure the new rate or benefit is worth locking up your money again. See how surrender charges work.
You might give up valuable benefits
Older contracts can carry guaranteed minimum rates, income riders or death benefits that new products no longer offer.
The money must move directly
The funds go from the old insurance company to the new one. If a check is made out to you, the exchange can fail and the gain may be taxed.
Partial exchanges have a 180-day rule
You can move part of a contract. But under IRS Revenue Procedure 2011-38, taking money out of either the old or new contract within 180 days of the transfer can make the exchange taxable. Annuity payments over 10 years or more, or over one or more lives, are the exception.
California has extra protections
California requires replacement disclosures when one annuity replaces another. If you’re 60 or older, you also get 30 days to return a new annuity for a refund (California Insurance Code §10127.10).
How a 1035 exchange works
- Review your current contract. Find the surrender schedule, your cost basis and any riders.
- Compare the replacement. Line up rates, surrender periods and benefits side by side. Our California MYGA rates are updated weekly.
- Sign the application and exchange forms. The new insurance company requests the funds from the old one.
- The funds transfer directly. This usually takes a few weeks, depending on the company releasing the money.
Common questions
Is a 1035 exchange the same as an IRA rollover?
No. Annuities held inside an IRA or 401(k) move by trustee-to-trustee transfer or rollover under retirement-plan rules, not Section 1035.
Does my cost basis carry over?
Yes. Your original basis moves to the new contract, so the deferred gain is still taxed when you eventually withdraw it.
Can I exchange a MYGA when its guarantee period ends?
Usually yes. Timing the exchange to the end of the surrender period avoids surrender charges, so start before the renewal window closes.
Can I exchange an annuity for life insurance?
No. Section 1035 doesn’t allow an annuity to be exchanged into a life insurance policy tax-free.
Is there a cost to do a 1035 exchange?
There’s usually no fee for the exchange itself, but any surrender charge on your current contract still applies.
Compare your annuity to today’s rates
See this week’s California fixed annuity (MYGA) rates, or call (877) 854-7396 to talk through your current contract with a licensed agent.
Sources
- 26 U.S. Code §1035 — Certain exchanges of insurance policies (Cornell Law School)
- Rev. Proc. 2011-38, Internal Revenue Bulletin 2011-30 (IRS)
- California Insurance Code §10127.10 (30-day return period for buyers 60 and over)
This page is general education, not tax or legal advice. Talk to a tax professional about your situation. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.