It is very simple to do that. When you work on the annuity paperwork, on the fund transfer form, you specifry this is a 1035 exchange and the money is from an insurance policy. Do not close the insurance yourself and let the annuity company sends the insurance company the notice to transfer the fund and close the insurance policy. That's it. Jim
1035 Exchanges
- Thread starter Wayne
- Start date
- 1,802
A direct rollover is required when transferring "qualified" money. A 1035 exchange is required when transferring "NON-qualified" money, and to carry-forward the cost basis.
A VA (Variable Annuity) can be transferred into a SPIA (Single Premium Immediate Annuity); but remember that there will be taxable gain on the income, because of the IRR (Internal Rate of Return) that the SPIA company pays.
There are many factors to consider when putting people into a SPIA. I have often found that you can create an income ladder and put the client in a better position (liquidity & more income); not to mention more commission for the broker. (Which is a Win-Win for both parties)
I have found many SPIA companies that will pay better than 2.5% IRR; so contact me if I can help.
Like it was said earlier; "like kind to like kind" is referring to the ownership of the annuity. Have a great day, I hope this helps.
A VA (Variable Annuity) can be transferred into a SPIA (Single Premium Immediate Annuity); but remember that there will be taxable gain on the income, because of the IRR (Internal Rate of Return) that the SPIA company pays.
There are many factors to consider when putting people into a SPIA. I have often found that you can create an income ladder and put the client in a better position (liquidity & more income); not to mention more commission for the broker. (Which is a Win-Win for both parties)
I have found many SPIA companies that will pay better than 2.5% IRR; so contact me if I can help.
Like it was said earlier; "like kind to like kind" is referring to the ownership of the annuity. Have a great day, I hope this helps.
like I said.....;-)
- 1,802
I thank you for your vote of confidence. I just read where you told him to ask me...............LOL
I will be more thorough next time.
- 1,271
SPIA uses exclusion ratio to determine your tax liability. E.g. If existing VA has earned 20% since its inception and you SPIA that, 20% of each payment will be taxable. Please correct me if I'm wrong but there is no 1035 with SPIA because there's no "tax deferral" with Immediate Annuity. SPIA can be tax advantageous because you can "spread out" the tax on the distribution whereas if you take distribution on a deferred annuity any gain will be 100% taxable LIFO.
- 1,802
Yes. The benefit of a 1035 exchange (with this situation) is that you get to carry forward the cost basis. Meaning that if the Principal to growth ratio is 20%; then that would be considered taxable income on top of the IRR that is payed by the SPIA company.
During annuitization, a portion of each annuity payment represents a return of non-taxable investment in the contract and the balance of each payment is considered taxable income. The taxable and non-taxable portions of the payments are determined by an exclusion ratio. The exclusion ratio for a fixed annuity is the ratio the investment in the contract bears to the expected return under the contract.
The exclusion ratio for a variable annuity is determined by dividing the investment in the contract by the total number of expected payments. Once the total amount of the investment in the contract is recovered using the exclusion ratio, the annuity payments are fully taxable. If the owner dies before the total investment in the contract is recovered, and annuity payments cease as a result of his death, the un-recovered amount is allowed as a deduction to the owner in his last taxable year.
Contact me for more details.....I hope this helps.
- 8,707
I only wish to add this to the above posts...nonqualified 1035 exchanges in certain states do incurr a state premium tax this tax may or may not be paid by the insurance company. I live in Maine we have a 2% tax so one thing to consider when doing 1035 exchanges from a poor or older policy to a new one is that it can incur a 2% fee for the client...Not all states are as stupid as Maine.
- 1,802
- 313
Yes, the SPIA will be generating income which will be taxed - that is to say when the tax deferred gains are distributed from the growth in the variable they will be taxed along with the portion that is not part of the exclusion ratio.
“Section 1035 of the U.S. Tax Code” is the method used to enact the exchange and there are a few important things you should know if this is an option you are considering.1035 exchanges enable you to move from one annuity to another without paying taxes.
Look at Exchanging one annuity for another, it goes into details even on partial exchanges: https://www.annuitieshq.com/articles/exchanging-one-annuity-for-another/
Because SPIAs are annuities, exchanging would be possible
Life insurance can be exchanged for an annuity. This includes exchanges to either a deferred annuity or a single premium immediate annuity (SPIA)
A deferred annuity can be exchanged for another annuity. This includes exchanges to either another deferred annuity or a SPIA
