SIE practice questionhardVariable Annuities — 1035 Exchange
A Section 1035 exchange allows an annuity owner to:
- AExchange one annuity contract for another without triggering a taxable event✓ Correct answer
- BWithdraw funds tax-free at any time
- CConvert an annuity into a traditional IRA tax-free
- DReceive a tax deduction for annuity contributions
Explanation
Why A — Exchange one annuity contract for another without triggering a taxable event
A Section 1035 exchange permits a tax-free exchange of one insurance product for a similar product (e.g., annuity to annuity, life insurance to annuity). No taxable gain is triggered. However, surrender charges on the old contract may still apply. A 1035 exchange cannot convert an annuity to an IRA (C). This provision encourages appropriate product changes without tax penalties.
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