A 1035 annuity exchange is a tax-free transfer of value from one non qualified annuity to another under Internal Revenue Code 1035. When executed correctly, the exchange preserves the contract'stax-deferred status by moving cost basis and gains directly from the relinquishing annuity to the receiving annuity without constructive receipt. The new annuity may offer better crediting methods,lower fees, or enhanced income riders. Surrender charges and new surrender schedules can apply, and required paperwork must be completed carrier-to-carrier. A 1035 exchange cannot move annuity funds into life insurance; it must be annuity-to-annuity for tax-free treatment.

In practice, advisors use a 1035 annuity exchange to move clients from legacy annuities with high fees or outdated crediting to contracts with better features or income riders-without triggering current taxation. The advisor prepares replacement comparisons, confirms surrender charges, andsubmits carrier-to-carrier paperwork. Suitability teams review liquidity, time horizon, and rider needs before approving. After transfer, the client continues tax-deferred growth under the newannuity. Exchanges are common in pre-retirement planning when aligning annuity benefits with income timelines, guaranteed lifetime withdrawal benefits, or fixed-indexed strategies tailored to current risk tolerance.