Are you aware of the tax free situations that are covered under the 1030 section of tax codes? Just one of those situations is the 1035 exchange. This section of rules was implemented to provide help and financial planning ideas to individual investors. If you happen to be familiar with real estate investments, you probably know about the 1031 exchange. In the 1031, properties are exchanged with a sale and a purchase and the resulting gains are not taxed because they are invested in the new purchase.
The 1031 is actually very similar to the 1035 exchange. Ultimately, they simply differ in the type of items that are exchanged. Instead of properties, investment assets are exchanged such as endowments, life insurance or annuities. These exchanges are done in ways that do not make them subject to capital gains taxes. Why do people move these types of assets? The situation will vary to each person but some common ones include simply needing the money for current expenses. Another may be that the investment is not performing as well as expected and a change it needed. As a rule, these investments are not taxed while they are actually invested, but once money is withdrawn from the investment, taxes on gains will occur.
In a situation of needing to switch an investment to a new company or a better performing option, what happens? As you can expect, any investment withdrawal will trigger a tax from the IRS. However, when reinvesting money, the word ‘tax’ is not something you want to hear. For this situation, the section 1035 exchange rules can help you. By following them, one can reinvest the funds without being required to pay a tax on the profits. While this is true, there may be some applicable taxes in some instances so you should learn about these ahead of time.
