Understanding Tax-Deferred Account Transfers: Section 1035 Exchange vs. IRA Rollover vs. Partial Surrendering and More

A Section 1035 exchange is most similar to which of the following transactions?AEffecting a partial surrender of a Universal Life policyBMaking an absolute assignmentCTaking out a loan against a traditional whole life policyDAn IRA rollover

D: An IRA Rollover- As is the case with an IRA rollover, a Section 1035 exchange allows for the transfer of assets from one tax-deferred vehicle to another without incurring tax consequences.

The most similar transaction to a Section 1035 exchange is a rollover of an individual retirement account (IRA). An IRA rollover is similar to a Section 1035 exchange because it involves moving funds from one tax-deferred account to another tax-deferred account without incurring any taxes or penalties.

Similarly, a Section 1035 exchange involves the exchange of an insurance policy or annuity contract for a new policy or contract, without incurring a tax liability. This exchange is done under the provision of Section 1035 of the Internal Revenue Code.

In contrast, partial surrendering of a Universal Life policy involves withdrawing a portion of the policy’s cash value, which can result in taxable income, surrender charges, and a reduction in the policy’s death benefit.

Making an absolute assignment involves transferring the ownership of the policy to another person, and taking out a loan against a traditional whole life policy involves borrowing from the policy’s accumulated cash value, which will decrease the death benefit and may cause the policy to lapse if the loan is not repaid.

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