Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What technique allows the rolling of assets from one annuity into another without taxation?

1. A direct rollover

2. A 1035 Exchange

3. A tax-free transfer

4. A tax deferral strategy

The correct answer is: A 1035 Exchange

The process that facilitates the rolling of assets from one annuity to another without incurring taxation is known as a 1035 Exchange. This exchange is named after Section 1035 of the Internal Revenue Code, which specifically permits the transfer of cash surrender value from one life insurance policy to another or from one annuity to another without triggering a taxable event. The primary benefit of a 1035 Exchange is that it allows individuals to transfer their investment into a new product that may offer better terms, features, or investment options without the immediate tax consequences that would normally accompany a withdrawal. This mechanism is particularly advantageous for individuals looking to realign their financial strategies without facing a tax liability. Other options, such as a direct rollover, primarily pertain to retirement accounts and may not apply to annuities in the same manner. A tax-free transfer is a vague term and can refer to various types of exchanges or transfers that are not as specific as the recognized 1035 Exchange. Lastly, while a tax deferral strategy may relate to how annuities grow, it does not address the process of transferring assets from one annuity to another without taxes.