General information only. Not tax, legal or investment advice. A planning idea named here is not a recommendation for any person. Prem Tax and Accounting Corp is a CPA firm, not a law firm. Tax rules change often and figures are for the tax year shown: confirm with the official source or a qualified adviser before you act. Read the full notice. Book a 10-minute call.

Current Topics

Fixed, indexed and variable annuities, and how a 1035 exchange works

Annuities differ in who carries market risk, but the tax rules are the same. A section 1035 exchange has strict steps. General information only, not a recommendation of any product, insurer or exchange.

Prepared by Prem Tax and Accounting Corp. Last reviewed November 6, 2026. Figures as of November 6, 2026.

Annuities come in several kinds, and a section 1035 exchange lets an owner swap one annuity contract for another without recognizing gain at that moment. This is general information, not advice to buy, keep or swap anything. We check any exchange with the Baton-Pass Transfer Test below.

The short version

Fixed, fixed indexed, registered index-linked (RILA) and variable annuities differ in who bears market risk, not in their tax rules.
Settled law: a direct annuity-for-annuity exchange recognizes no gain or loss. Cash taken out is taxed up to the gain, and your cost carries over.
A partial exchange needs 180 days with no withdrawals from either contract.

The four deferred kinds

Kind	Who bears market risk	How growth is credited	Regulated by
Fixed	Insurer	Rate set by the insurer, minimum promised by the contract	State
Fixed indexed	Shared	Index-linked credit after a cap, participation rate or spread; never below zero	State
RILA	Shared	Index-linked; the credit may turn negative, within limits the insurer usually sets	State and SEC
Variable	Owner	Fund subaccounts; no limit on gains or losses	State and SEC

An insurer's promises depend on its financial strength and claims-paying ability. MYGA, short for multi-year guaranteed annuity, is an industry label for a fixed deferred annuity whose rate holds for a set term, then renews; we found no official definition.

The exchange rules

Rule	What it means	Source
Annuity for annuity	No gain or loss recognized; not allowed into life insurance	IRC 1035(a)(3)
Same people	The person the insurer owes, and the annuitant, stay the same	Reg. 1.1035-1
Cash taken out	Taxed to the extent of the gain	IRC 1035(d)(1)
Cost basis	Carries over, with no reset or step-up	IRC 1035(d)(2)
Direct transfer	A check made out to the owner is a taxable distribution	Rev. Rul. 2007-24
Partial exchange	Nothing received from either contract for 180 days from the transfer date	Rev. Proc. 2011-38

An invented example

Lena owns an annuity worth $200,000 with $120,000 of cost. She sends $50,000 (25 percent) straight into a new annuity. That contract takes on $30,000 of her cost, and the old one keeps $90,000 on $150,000 of value. A $5,000 withdrawal from either within 180 days would take the transfer outside the safe harbor.

Still open A National Association of Insurance Commissioners (NAIC) group meets November 9, 2026 on a revised annuity buyer's guide. We found no newer IRS revenue procedure on partial annuity exchanges.

The Baton-Pass Transfer Test

People in this situation often consider these steps; ask your adviser.

Confirm both contracts are annuities with the same holder and annuitant.
Have the money move insurer to insurer, never through the owner.
Ask the old insurer for the cost in writing and confirm the new one records it.
Plan no withdrawals from either contract for 180 days after a partial exchange.
Ask about the old surrender charge and the new surrender period; a seller may have a financial incentive.

See the annuities group page, how annuity income is taxed, cautions, fees and NIIT and retirement tax savings.

Common questions

Does every annuity swap escape current tax?

No. Only a direct transfer between qualifying contracts counts, and cash taken out is taxed.

Do indexed annuities give stock market returns with no risk?

No. Caps and spreads limit gains, dividends are usually excluded, and insurers can usually reset rates.

Do the tax rules differ by type?

No. Outside a retirement plan, every type owned by an individual is taxed under section 72, and gain is ordinary income.

Official sources

Keep reading

Please read: general information only

This page gives general information and education about current federal and state tax topics, including recent legislation, planning ideas, retirement and annuity rules, and court decisions. It is not tax, legal, accounting, investment, insurance or other professional advice, and it is not a substitute for advice from a qualified CPA, attorney or other adviser who knows your facts. Reading it does not create a CPA-client or any other professional relationship with Prem Tax and Accounting Corp. Prem Tax and Accounting Corp is a CPA firm, not a law firm. It does not sell insurance or investment products, and it does not recommend, rate or sell any annuity, fund or other product. A planning idea, a strategy name or an example here is not a recommendation to take or avoid any action.

Tax rules, thresholds, rates and deadlines change often, and Congress, the IRS, the courts and the states change how they apply them. Guidance on recent legislation is still being issued. We checked the figures against the official sources named on the page on the date shown (last reviewed November 6, 2026), but we do not promise that this page is complete, current or free of errors, and we do not update it the moment a rule changes. Where the rules are unsettled or guidance is still pending we say so. Amounts for a future year are labelled planning figures until the IRS or another agency publishes them. Examples use invented numbers and are for illustration only.

To the fullest extent the law allows, Prem Tax and Accounting Corp and its owners and staff are not responsible for any loss or decision that results from using this page. Links to government and other websites are for convenience and we do not control them.

This content is copyrighted by Prem Tax and Accounting Corp. Copying it in bulk, scraping it, or using it to train artificial intelligence systems requires our written permission.

Questions about how the new tax law or your year-end moves apply to you? Keshav Agrawal is a U.S. CPA and a Chartered Accountant (CA) from India. We prepare U.S. and Illinois returns, plan with you, and work alongside your financial adviser, insurance agent or attorney. We sell no investment or insurance products. Book a 10-minute call or send us a message.

Let's talk about your taxes, your business, your plans.

Tell us what you need and we will get back to you quickly. There is no pressure: just a friendly conversation and a clear next step.

Book a 10-minute call Call us

Prem Tax and Accounting Corp
4260 Westbrook Dr, Suite 107
Aurora, IL 60504

Monday to Friday, 9:00 am to 5:00 pm, by appointment. Saturday and Sunday by appointment when needed.