![]() ![]() That full $20,000 distribution would be taxable income. An exception to the 180 day rule is if the distribution is received as an annuity for life or a period of 10 years or more.Īn annuity owner has a $100,000 nonqualified deferred annuity with $80,000 basis and needs to take a $20,000 distribution. ![]() Taking a distribution from either contract within 180 days of a partial 1035 is likely to be scrutinized by the IRS as a tax avoidance device and may result in higher taxes, penalties and fees. That causes the full amount of income from both contracts (up to the amount that was distributed) to be taxable, as opposed to only taxing income from the contract that distributed the funds. The IRS may treat a distribution in this time period as being a part of the original transaction. To qualify as a tax-free partial 1035 exchange, clients may not take a distribution from either contract within 180 days of the exchange. So the IRS has placed additional rules for these types of exchanges. ![]() The basis and income will be split pro rata between the two contracts, which creates a potential for abuse. Partial 1035 restrictions on distributionsĬlients may exchange a portion of an annuity contract for another annuity contract tax-free when certain requirements are met. ![]()
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