Tax Rules on Partial 1035 Exchanges 2011
New Nonqualified Annuity Partial Exchange
and Annuitization Rules
IRS Rev. Proc. 2011-38 addresses
partial 1035 exchanges and partial annuitizations of
nonqualified annuities that occur
Oct. 24, 2011 and later
Partial Exchanges and Transfers
- IRS Rev. Proc. 2008-24 established a 12-month period
during which withdrawals could not be taken from a
nonqualified annuity contract involved in a partial 1035
exchange without resulting in the exchange being treated as
a taxable distribution, rather than as a nontaxable 1035
Rev. Proc. 2011-38 reduces this time period to 180
- Previously, exemption from treatment as a taxable
distribution required meeting qualifying exceptions, such as
an owner attaining age 59½, death, disability or a life
event (i.e., divorce or job loss) occurring between the date
of the partial 1035 exchange transfer and the date of the
withdrawal or surrender of a contract involved in a partial
Meeting an exception is no longer required.
- Limitations on withdrawals from an annuity involved in a
partial 1035 exchange within 180 days of its funding do not
- amounts received as an annuity paid for a period of
- annuity payments based on one or more lives.
- Automatic treatment of a transfer as either a tax-free
1035 exchange or a taxable distribution followed by payment
for a second contract is eliminated. Now, if a portion of a
nonqualified annuity is transferred from its issuing company
to a nonqualified annuity issued by the same or another
insurance company, and a withdrawal is taken from either
contract within 180 days, the IRS will determine how to
treat this annuity distribution for income tax purposes on a
case-by-case basis by applying general tax principles.
This communication is to reiterate our
business rules concerning the use of a contract's free amount to
fund 1035 exchanges or qualified transfers:
Contract owners cannot use the 10% free withdrawal
provision of the contract to make a partial exchange of
nonqualified funds under Internal Revenue Code 1035, or
a trustee-to-trustee transfer of qualified funds if the
premium associated with the exchange or transfer is
still subject to withdrawal charges.
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