1035 Exchange Step by Step Guide (2026): How to Move Annuities Tax-Free
Written & reviewed by Hans Goldstein, EA, Independent Licensed Insurance Producer · CA license 4273294 · NPN 20602398Admitted to practice before the IRS
Independently reviewed & last reviewed 2026-10-03
Short answer
What is a 1035 exchange for an annuity, and can I move a MYGA to another MYGA?
A 1035 exchange is a tax-free swap of one annuity contract for another under IRC §1035. The old insurer sends the money directly to the new insurer, so the gain you have built up stays tax-deferred instead of being taxed as a withdrawal.
Yes, MYGA to MYGA is the most common use: when a MYGA term ends, you can exchange it into a new MYGA at a better rate or a stronger carrier.
The rules that trip people up: the transfer must be insurer to insurer (a check made out to you is a taxable surrender), an annuity cannot be exchanged into life insurance, surrender charges on the old contract still apply if you move before the term ends, and after a partial exchange nothing should come out of either contract for 180 days (Rev. Proc. 2011-38).
Quick take: A §1035 exchange is a tax-free swap from one annuity (or life insurance) into another. You don't pay income tax on accumulated gains when transferring. Most buyers don't know this exists or how to do it. Below: the actual process.
CD vs MYGA, after tax
What $100,000 earns in 5 years: CD vs MYGA, after tax
Rates used: CD 5.00%, the top nationally available 5-year CD (Bankrate, October 14, 2026); change it to the rate you are offered. MYGA 5.95%, the best A-rated rate we track as of October 13, 2026: Delaware Life Pinnacle Plus 5-year (AM Best A-, negative outlook, 7/31/2026), $100,000 and up, effective October 6, 2026 (Delaware Life rate sheet).
| CD, interest taxed every year | $121,081 |
|---|---|
| MYGA, tax-deferred, before tax | $133,507 |
| MYGA after paying tax on all the interest at withdrawal | $126,136 |
| Tax deferral alone adds about | $674 |
| MYGA ahead of the CD, after tax | $5,055 |
Assumes 22% federal and 0% state income tax, no withdrawals, rates held for the whole term. MYGA interest is taxed as ordinary income when you withdraw it, not as capital gains. Gains taken before age 59 1/2 can owe a 10% IRS penalty, and cashing out early can cost a surrender charge.
In an IRA both grow tax-deferred, so the edge there is the rate alone. Bank and credit union deposits are FDIC or NCUA insured up to the limits; a MYGA is backed by the issuing insurer's claims-paying ability and your state's guaranty association up to its limits, not the FDIC. General education, not tax, legal or financial advice.
What §1035 allows
Under IRC §1035, you can swap tax-free:
| FROM | TO |
|---|---|
| Annuity | Annuity (most common: MYGA-to-MYGA, FIA-to-MYGA, etc.) |
| Life insurance | Life insurance |
| Life insurance | Annuity (life → annuity allowed) |
| Annuity | Life insurance: not allowed (IRC §1035 does not permit annuity to life insurance) |
| Annuity | Long-term care |
| Life insurance | LTC |
The transfer is direct carrier-to-carrier. You never personally receive the funds (that would trigger taxation).
When §1035 makes sense
1. Your old annuity has matured + better rates exist elsewhere
- MYGA at 3.5% maturing → §1035 to new MYGA at 5.85%
- Tax-free transfer of gains
2. Your old FIA has weak caps you can't fix
- Old FIA cap dropped to 2.5%
- §1035 exchange to new FIA with 7%+ cap
3. You want to move to a stronger carrier
- Old carrier downgraded (e.g., AM Best A → B+)
- §1035 to A-rated carrier
4. You want to add income rider that old contract doesn't have
- Old accumulation FIA → §1035 to FIA with GLWB income rider
5. You inherited an annuity you want to restructure
- Inherited annuity from deceased spouse → §1035 to your preferred structure
When §1035 does NOT make sense
❌ Triggers new surrender charges
- New contract = new 7-10 year surrender clock
- Pay only if new product is clearly better
❌ The "new product" has bigger commission for agent
- If the agent is pushing you to §1035 a contract still in good shape, ask why
- Calculate: does the new product's benefit ACTUALLY beat the old one + the new surrender lockup?
❌ Your old policy has a great rider you'd lose
- Some old GLWBs have grandfathered rollup rates (e.g., 10%/yr) that can't be replicated
- Don't §1035 away a great old income rider
Is the annuity you're looking at actually the best one available?
Send your email and I'll send what it really guarantees, what the surrender schedule costs you, and the two or three carriers paying more for the same guarantee. If it's already a good fit, I'll tell you that.
We’ll email it to you. Hans reads every one himself and replies within one business day. Hans Goldstein · NPN 20602398.
Rather talk it through? Or book 15 minutes on Hans’s calendar.
Step-by-step process
Step 1: Identify the source contract
- Get carrier, policy number, current account value, current surrender charge
- Pull the contract document
Step 2: Shop the new product
- Get 3 quotes from the agent
- Confirm new surrender period, riders, caps
Step 3: Apply for new contract
- Sign the application
- Mark §1035 exchange box
- Identify source carrier + policy
Step 4: Carrier-to-carrier transfer
- New carrier sends §1035 paperwork to old carrier
- Old carrier sends funds DIRECTLY to new carrier (not to you)
- Takes 2-6 weeks typically
Step 5: 1099-R from old carrier
- You'll receive 1099-R coded "6" (§1035 exchange)
- Report on tax return but no tax owed
Common §1035 traps
Trap 1: Surrender charges still apply
The §1035 status doesn't waive surrender charges on the OLD contract. If you're 2 years into a 10-year surrender, you'll still pay the surrender charge on the way out.
Math: Old contract value $150K, surrender charge 8% = $12K surrender charge → $138K transfers to new contract.
Trap 2: New contract starts a new surrender clock
If you §1035 to a new 10-year surrender FIA, you now have 10 years of surrender on that money.
Trap 3: Loss of grandfathered features
Some pre-2010 contracts have features (e.g., 10% guaranteed annual roll-up on income rider, exotic crediting strategies) that can't be replicated in modern contracts.
Trap 4: Partial exchange complications
You can do a §1035 partial exchange (move SOME funds), but it gets complicated:
• Cost basis allocated proportionally
• Recent IRS rulings restrict aggressive partial exchanges
• Get a tax professional involved for partial moves
Trap 5: Inherited annuity special rules
Inherited annuities from non-spouses cannot be §1035 exchanged. You must continue the inherited contract or surrender it.
§1035 from annuity to LTC
This is a powerful + underused move. Tax-free transfer of annuity gains to hybrid LTC contract:
- Old annuity with $50K gains + $100K basis = $150K total
- §1035 to hybrid LTC (e.g., OneAmerica Asset Care)
- $50K gains become tax-free LTC benefits (PPA 2006 §844)
- This is one of the only ways to convert annuity gains to tax-free dollars
Conditions: hybrid LTC must qualify under §7702B (most modern hybrids do).
What to do
If you're considering a §1035, get a written analysis showing:
1. Surrender charges on old contract
2. Cost basis being transferred
3. New product features vs old
4. Break-even period (how long until new product net-of-surrender pays back)
5. Whether you'd lose any grandfathered features
213-414-2808 for a no-charge §1035 exchange analysis. Hans evaluates whether the move makes sense for YOU vs being good for the agent's commission.
About Hans Goldstein: Independent retirement income specialist. CA Life License #4273294. NPN #20602398. Reviews 30+ carriers. Phone: 213-414-2808. Email: [email protected].
Goldstein Complexity Index
Every annuity I review gets a complexity score from 0 to 100. Higher means harder to understand. Complexity is where buyers get hurt: riders they didn't know they were paying for, surrender charges that surprise them, and income "benefit bases" they took for cash. SPIAs and MYGAs score low. Products that stack a bonus, an income rider, an MVA and several crediting options score high.
This product's score: 8/100, Grade A+ (Transparent)
Easy to understand. Few moving parts. The buyer can fully explain the product to a friend after one read of the contract.
Score breakdown
| Dimension | Score (1-10) | What this measures |
|---|---|---|
| Riders | 1/10 | How many riders, optional or built in (income, death benefit, LTC). Each one adds cost and one more thing to understand. |
| Crediting strategies | 1/10 | How many index options (cap, spread, participation rate, step rate, volatility-controlled indices). More choices are harder to follow. |
| Surrender complexity | 1/10 | Length of the surrender period, plus any MVA and bonus recapture. The longer and more layered it is, the harder it is to know what leaving early costs. |
| Benefit-base separation | 1/10 | Whether there is a separate income base ("PIV") that is not cash but looks like it. This causes more buyer confusion than anything else. |
| Bonus structure | 1/10 | A premium bonus with a recapture schedule. The bonus is real, but you can lose part of it if you leave early. |
How to read this
- A+/A (0-40): Easy to understand. A pure accumulation FIA, a MYGA or a SPIA. Little room for mis-selling.
- B (41-60): Read the contract carefully and get a second opinion before signing. Income riders cause most of the confusion.
- C (61-80): Many owners don't fully understand what they bought. Common mis-sells: a bonus presented as cash, a benefit base presented as account value, surrender charges glossed over.
- D (81-100): Get an independent second opinion before signing. The product may still fit you, but the odds you later say "I didn't know it worked that way" are high.
Why it matters: nobody gets sued for selling a complicated product, but buyers regret them all the time. An annuity that wins your money in year one and confuses you for the next 14 is worse than a simpler one you understood from the start. Simple products are easier to check.
Renewal rate risk: FIA caps can change after year one
The cap you are quoted on a fixed indexed annuity is not locked like a mortgage rate. It covers the first crediting period, usually one year. At each contract anniversary the carrier can reset it anywhere above the contract minimum.
It works much like a high-yield savings rate: the bank can lower that next month, and the carrier can lower your cap next year. The reason is how caps are funded. The carrier puts most of your premium in bonds and uses part of the yield to buy index options.
When bond yields fall, that option budget shrinks and caps get cut. Caps were cut across the industry in the 2010-2021 low-rate years and came back after 2022.
The minimum cap is the only guarantee
Every FIA states a minimum guaranteed cap in the contract. Of the 99 FIAs we found that publish one, 86 let the insurer cut the cap to 1% or less, and some go as low as 0.25%. A few set 2% to 3%, and several insurers publish no number at all (FIA minimum cap data, checked October 4, 2026). Read that number before you sign.
Questions to ask before you buy
- "What is the minimum guaranteed cap in this contract?"
- "Can you show me this product's in-force renewal-rate history for the last 5 years?"
- "What cap are contracts sold in 2020, 2018 and 2015 getting today?"
- "If the cap drops to the minimum, what would I realistically earn each year?"
If the agent can't answer questions 2 and 3 with documents, you don't have enough information to buy yet.
Annuities in plain terms
An annuity is an insurance contract. You pay a premium, in one lump sum or over time, and get one of three things back:
- Lifetime income (SPIA: pay once, get a check every month for life)
- Tax-deferred growth with downside protection (FIA: index-linked interest with a cap and a 0% floor)
- A fixed rate for a set term (MYGA: works like a CD, with the tax deferred)
The carrier pays for these out of its bond portfolio and, for FIAs, an option budget that buys the index-linked credit.
Every annuity trades liquidity and growth for certainty. A SPIA gives the most certainty (income for life), but you give up access to the principal. An FIA protects the downside but caps the growth.
A MYGA locks the rate but ties up the money for the term. To see what a SPIA could pay you after tax for your age and state, try the SPIA vs GLWB vs DIA calculator.
Quick FAQ
Q: Are annuities ever "good investments"?
A: Yes, when used for what they do well: income certainty, downside protection or a locked rate. They go wrong when sold for something else, like a SPIA pitched for "growth."
Q: What's the difference between immediate and deferred annuities?
A: An immediate annuity (SPIA) starts paying within 12 months of purchase. A deferred annuity grows for years before payments begin.
Q: Who regulates annuities?
A: State insurance commissioners. (RILAs are also FINRA-regulated as securities.)
Q: What's the state guaranty fund limit?
A: Usually $250,000 to $300,000 per owner per carrier, depending on the state. Splitting a large purchase across carriers keeps each piece inside the limit.
Q: How do I compare annuities side-by-side?
A: Compare the carrier's ratings (AM Best, S&P, Moody's, Fitch, Weiss, KBRA composite), the Goldstein Complexity Index, the carrier's renewal-rate record, its service, and how the structure fits what you need the money to do.
Q: When should I get a second opinion?
A: Before you sign any annuity over $50,000. An independent review costs nothing and can save you thousands.
Get a second opinion before you sign
Talk to Hans Goldstein, a licensed independent insurance producer.
A fixed indexed annuity ties up your money for 7 to 15 years. Cap rates renew annually and can drop. Income riders have separate benefit bases that aren't cash. Get an independent review before you commit your retirement savings to a multi-year contract.
Send your details. Within one business day you get a written review of your quote, a side-by-side with two alternatives, and a free 15-minute call if you want one.
Rather talk it through? Or book 15 minutes on Hans’s calendar, or call 213-414-2808.
Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer appointed with multiple A-rated carriers
We’ll email it to you. Hans replies within one business day. Privacy Policy.
Disclosure
This review is based on the carrier's public product materials and rates as of the date shown above. Annuity rates, caps, participation rates, payout factors, crediting methods, and long-term care benefit structures change often, sometimes monthly. Confirm current figures in the latest carrier disclosure and the contract before you buy. This is general education, not a personal recommendation or an offer of any product. Hans Goldstein is an independent licensed insurance producer (CA license 4273294, NPN 20602398) appointed with several A-rated carriers. His appointment with the carrier reviewed here may vary, and this review is not an endorsement. No carrier paid for this review. Always read the actual contract and consult a licensed advisor before purchasing any annuity or long-term care insurance product. Past index performance does not predict future credited interest. Annuities and hybrid life+LTC policies are long-term contracts with surrender charges; they are not suitable for funds you may need before the end of the surrender period. AM Best ratings and tax treatment are subject to change. Tax discussion of IRC §7702B, §1035, and the Pension Protection Act of 2006 reflects law as of 2026 and is subject to change.