Like most other Americans that are saving for retirement, you probably need to make adjustments in your investment or retirement portfolio from time to time. Of course, making these changes will have tax consequences, unless they happen inside a tax-deferred account or plan.
However, if you own any type of life insurance or annuity, then you do not have this restriction, thanks to the extremely powerful lobby group that the life insurance industry has in Washington. Regardless of whether your contract is inside an IRA or qualified plan or not, the IRS will allow you to move your policy or annuity into another contract without taxation. The rules for doing so are similar to those for IRA transfers or rollovers, meaning that the exchange must be done directly. The owner cannot take constructive receipt of the policy or contract proceeds. Therefore, if you have a life insurance policy that you want to move from one carrier to another, then the current carrier will simply cut a check directly to the new carrier for the amount of the policy.
There is a considerable amount of freedom in how 1035 exchanges can be done. One annuity can be exchanged directly into another, the same as for life insurance. Life insurance can also be exchanged into an annuity contract as well. However, this provision does not work in reverse. The IRS does not permit annuity contracts to be transferred directly into any kind of cash value life insurance. Finally, a 1035 exchange can be combined with new money to create a larger new contract. For example, assume that you have a $100,000 fixed annuity that has come due. If you would like to transfer the contract to another annuity company that is paying a higher rate, then you also have the option of adding more money to the new contract. If you were to put in another $100,000, then that will be combined with the incoming contract to make a single $200,000 annuity. Of course, in this case, if the current contract is contained inside an IRA or qualified plan, then any additional money put into the contract would be limited by the appropriate contribution limits. These rules hold true for fixed, indexed and variable insurance products.