Can you use a 1035 Exchange on an existing IRA to convert/passalong $ tax-free to an existing variable annuity prior to the 70 1/2 mandatory distribution?
State/Country relating to question: Illinois
Nothing. Usually get my answer here.
Hi and welcome to Just Answer!
An exchange of a portion of an annuity contract into a new annuity contract is treated as a tax-free exchange under section 1035 of the Code.
Section 1035(a)(3) provides that no gain or loss shall be recognized on the exchange of an annuity contract for an annuity contract. Section 1.1035-1 of the Income Tax Regulations provides that the exchange, without recognition of gain or loss, of an annuity contract for another annuity contract under § 1035(a)(3) is limited to cases in which the same person or persons are the obligee or obligees under the contract received in the exchange as under the original contract.
Section 1035 provides favorable tax treatment for the following types of assets only:
--Life insurance contract for an annuity contract, endowment contract, or another life insurance contract.
--An endowment insurance contract for an annuity contract or another endowment contract.
--An annuity contract for another annuity contract.
Any other exchanges will trigger taxation of any gain in the original contract.The IRA account itself may not be exchanged under section 1035.
If the Taxpayer owns an annuity contract inside the IRA account - it may be exchanged for another annuity contract also inside the IRA account - while you may claim tax-free exchange under section 1035 - there is no need because everything inside the IRA is not taxable anyway.
However when assets are distributed from IRA account - the taxable income is recognized regardless how assets are used. Even if you distribute an annuity contract from the IRA account - the taxable income is recognized.
Sorry if you expected a different answer.
Let me know if you need any help.
Taxes, Immigration, Labor Relations