William Penn Life, 2011 (46. évfolyam, 1-12. szám)
2011-10-01 / 10. szám
Annuity Essentials by Debbie Evans Section 1035 Exchanges How to move your money without incurring taxes IN THE FIRST installment of "Annuity Essentials," I defined IRA rollovers and transfers. In this installment, I would like to provide you with information on how you can move your money from one contract (life insurance and non-qualified annuity) to another without incurring any taxes. These transactions are all referred to as "Section 1035 exchanges." Section 1035 of the Internal Revenue Code provides that certain tax-deferred instruments can be exchanged for similar contracts without any tax consequences. Specifically, Section 1035 stipulates that "no gain or loss shall be recognized on the exchange of: • a contract of life insurance for another contract of life insurance or endowment; or • a contract of life insurance for an annuity contract; or • an annuity contract for an annuity contract. This tax-free exchange provides consumers with great opportunities. If needs change and circumstances require, you can exchange one kind of contract for another without incurring any taxes. However, like any other opportunity, 1035 exchanges require knowledge regarding how the law works in order to take advantage of the option to move your proceeds taxfree. The basic rules for 1035 tax-free exchanges The following exchanges can be made: • life insurance to annuity • annuity to annuity The funding method and premium payment mode are irrelevant. Any type of cash value life insurance policy can be exchanged for any type of annuity. The new annuity can be with the same insurer or with a different insurer. The requirements are: • The owner and the insured (or the annuitant) must be the same under both the existing contract and the new contract. • The owner and the insured (annuitant) should not take constructive receipt of the funds. The existing insurer should transfer the funds directly to the new insurer. • Partial exchanges are acceptable as long as the funds are transferred directly to the new contract (see your tax consultant for additional details to keep this exchange tax-free). If you are considering or have been offered the option of a tax-free Section 1035 exchange, consider whether it will result in a measurable economic benefit for you. We recommend that you check with the replacing company, requesting information on: • penalty periods that may exist within the contract, • how such penalties are applied, • any fees that are charged for administration, • any limitations on partial withdrawals, • how your money is invested, • guaranteed and excess interest rate growth, and • how interest accumulates and compounds. Take this information and compare the details of the new contract with your current contract. Only then will you be able to firmly determine if a Section 1035 exchange will be a benefit to your economic future. Debbie Evans, FIC, is WPA's Annuity Specialist. You can reach Debbie at 1-800-848-7366, ext. 127, or by email at devans@williampennassociation.org. To learn more about the potential financial benefits of Section 1035 exchanges and how a William Penn Association Tax-Deferred Annuity can benefit you and your financial future, contact your local WPA representative or our Home Office toll-free at: 1-800-848-7366 4 ° October 2011 ° William Penn Life
