FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client has a nonqualified variable annuity issued five years ago and wants to move the funds to another variable annuity with a different insurance company without incurring current taxes. Which of the following provisions allows for this tax-free transfer?
- ASection 1035 Exchange
- BTransfer of Assets
- CSection 403(b) Exchange
- DRollover to an IRA
Show answer & explanationAnswer & explanation
Correct answer: A. Section 1035 Exchange
A Section 1035 exchange allows for the tax-free transfer of funds from one annuity contract to another annuity contract, or from an annuity to a life insurance policy, or from a life insurance policy to another life insurance policy. This provision specifically addresses the scenario described for nonqualified contracts.
Why the other options are wrong
- B. While it is a 'transfer of assets,' this term is too general; Section 1035 is the specific IRS provision that makes it tax-free.
- C. Section 403(b) exchanges apply to specific retirement plans for public schools and certain non-profit organizations, not general nonqualified annuities.
- D. While rollovers exist for qualified plans, a direct rollover from a nonqualified annuity to an IRA is not a standard tax-free transfer mechanism for annuities.
Section 1035 Exchange
A Section 1035 exchange is an IRS provision that allows for the tax-free transfer of funds from one annuity contract to another annuity contract, or between certain other types of insurance products, without triggering current taxation on any gains.
- Tax-free exchange of insurance products.
- Applies to: annuity to annuity, life insurance to life insurance, life insurance to annuity.
- Does not apply to annuity to life insurance.
- Preserves tax-deferred status of accumulated earnings.
Memory trick: Ten-Thirty-Five: Trade Annuity, Tax-Free Thrive.