Save taxes using a partial annuity exchange

Description

Abstract: Initially, nonannuity payments (distributions received before the annuity starting date) generally consist entirely of taxable income until all of the annuity contract’s earnings have been distributed. Subsequent payments are considered to be a nontaxable return of basis. Because of this issue, when an annuity owner must take a nonannuity distribution, the tax impact can be onerous. But, as this article explains, Internal Revenue Code Section 1035 can, in some cases, provide a federal tax-free mechanism to exchange one annuity contract for another annuity contract.