Annuities✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
Under IRC Section 1035, which of the following exchanges is NOT eligible for tax-free treatment?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Section 1035 permits tax-free exchanges among life insurance policies, between a life policy and an annuity, and between annuity contracts. However, an exchange of an annuity contract for a life insurance policy is not tax-free under Section 1035, because the permitted direction is one-way. The policyholder would recognize taxable gain on the annuity's surrender. This one-way direction is a frequently tested 1035 point.
Why the other options are wrong
- B) A life insurance policy to annuity exchange is expressly permitted by Section 1035.
- C) An annuity to annuity exchange is permitted when the same owner and other requirements are met.
- D) A life to life exchange is the classic permitted 1035 transaction.
Memory hook
1035 traffic rule: life can go to life or annuity, annuity can go to annuity, but never back to life.