Michigan Variable Annuities Practice Test

A 1035 exchange can trigger which of the following?

Surrender charges and new costs may apply. No additional costs. Immediate taxes on gains. A mandatory tax on the entire account value.

Correct Answer:

Surrender charges and new costs may apply.

Explanation:

A 1035 exchange moves funds from one annuity to another tax-free, but it doesn’t wipe out the contract-specific costs. Each annuity has its own surrender-charge schedule and potential fees. If you transfer within or soon after the surrender period, you can face surrender charges on the old contract and the new contract may impose its own costs. The transfer itself isn’t taxed, so immediate taxes on gains or a mandatory tax on the entire account value aren’t triggered. And saying there are no additional costs isn’t accurate because these charges can apply depending on the contracts involved.

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