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1035 Transfers

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1035 Transfer
1035 refers to a provision in the tax code which allows for the direct transfer of accumulated funds in a life insurance policy, endowment policy, annuity policy to another life insurance policy, endowment policy or annuity contract without creating a taxable event.

Title 26, Subtitle A, Chapter 1, Sub chapter O, Part III, Section 1035 states that “no gain or no loss shall be recognized on the exchange” of life insurance policy for another life insurance policy or endowment or annuity policy. A endowment for another endowment with a maturity no later than the maturity date of the endowment being replaced.

Non Taxable Transfers
Robert purchased a life insurance policy 20 years ago with a death benefit of $100,000, the premium was $1,000 a year and has a cash surrender value of $75,000. Robert is now retiring and has adequate life insurance provided by another life insurance policy.

Robert doesn’t need any income at this time but has decided to purchase an annuity paying a guaranteed rate of interest at 6.0%. Robert doesn’t want to “cash in” in his life insurance since there would be a “gain” which would be taxed.

The value of the policy is $75,000 the premiums paid total $20,000 and if Robert “cash in” his policy the gain of $45,000 would be subject to taxation.

The solution is to “cash in” his life insurance policy by executing a “1035 transfer”. Robert would fill out a 1035 transfer form which would direct the life insurance company to “cash in” his policy and send the $45,000 directly to the company which is issuing his annuity policy.

In this way there would be no taxes due, further the “cost basis” of $20,000 would become the “cost basis” of his annuity contract.

1035 transfers used with annuity or variable annuity contracts in the same way to transfer the funds of one annuity to that of an annuity paying a higher rate of interest. It is suggested that before you do this, check an see if there would be any penalties or surrender charges imposed before you “cash in” an annuity contract.

Congratulations you have a new job! You’ve just retired! In either case you have to decide what you want to do with the assets you have accumulated in your retirement plan.

Leaving it where it is?
Sometimes your former employer may allow you to leave the assets you have accumulated within your current plan. However you may have greater investment options and greater flexibility in withdrawing your funds by rolling over your assets into your own IRA.

Transferring it to your new employer?
Your new employer allows you to rollover your assets from you former employer to your new employer’s retirement plan. A good choice? Again your investment options are limited to the choices that are available within your new employers plan.

Some plans may also impose a “waiting period” before you can rollover your money from your former employer.

Taking your money in cash?
Most often this is least desirable option. If your former employer sends you a check they are required to withhold 20% for federal taxes. In addition if you do not deposit balance in another retirement plan or IRA within 60 days, the entire amount becomes taxable. If your under age 59 1/2 you may be subject to an additional penalty of 10%.

Separate IRA for Rollovers
Most often opening an IRA just for money that will be rolled over from one or more retirement plans is usually the best solution. The advantages of opening an IRA just for rollovers; You can transfer these funds back into an employer sponsored retirement plan if you decide to.

You have the option of placing these funds in a wide variety of investment options including, mutual funds, variable annuities, annuities and self directed IRA’s.

The ease of calculating the minimum required distributions amount based on one account verses several accounts. Many times the institution with whom you opened your IRA will assist you in calculating the minimum distribution amount.

Reference Tax Code Section 1035

If you have questions concerning a 1035 transfer, please call us at (209) 918-4016