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Level 1

1099-R and like kind exchange

I took a complete distribution from a whole life insurance policy and received a 1099-R for the transaction. A month later I invested the same amount in an annuity as a like kind exchange. How do I report these transactions on Turbo-tax to avoid paying taxes on the gain reported on the 1099-R?

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Level 1

1099-R and like kind exchange

Edited 2/26/18 5:21

Enter the 1099R exactly as it appears.

1035 exchange is a rule that permits tax free transfers of “like assets” under the tax code. Like asset in this case means insurance product to insurance product. Specifically under 1035: cash value from a life insurance contract can be exchanged into a new annuity or life insurance.

  • You would receive form 1099-R - from your life insurance administrator. 
  • Your form 1099-R Box 7 would have Code 6 - Section 1035 exchange (a tax-free exchange of life insurance, annuity, or endowment contracts).
  • As you enter your 1099-R, TurboTax will recognize the Code 6- Section 1035 exchange and not tax it. Click on Where do I enter my 1099-R?

What is a 1035 Tax Free Exchange?

A 1035 tax free exchange is the I.R.S. tax code that allows for the rollover of a non-qualified annuity (or transfer of a life insurance policy) to a new annuity or life policy of equal or greater value. Capital gains and/or income taxes will not be realized from this type of transfer when completed properly.

There are only three examples of a 1035 exchange:

  • Annuity to Annuity
  • Life Insurance to Life Insurance
  • Life Insurance Cash Value to Annuity

The I.R.S. does not allow for a 1035 exchange from a tax deferred annuity to any type of life insurance policy. If you want to buy a life insurance policy with the proceeds from an existing annuity, you will first have to annuitize (or surrender) your annuity and pay taxes on any deferred gains.

You may roll your policy over to an annuity contract. An annuity is an insurance policy that acts like a long-term savings contract. These contracts might guarantee your principal plus an interest earning (in the case of a fixed annuity) or they may offer you the potential for higher investment earnings through mutual fund investments. No one guarantees gains from mutual fund investments, which may lose value over time. You pay tax on investment when they are withdrawn. If you take withdrawals before age 59 1/2, you will be assessed a penalty of 10 percent by the Internal Revenue Service, since these types of policies are treated the same as a non-qualified retirement account.

IRA Prohibitions

IRAs and life insurance policies don't mix. You can't buy life insurance within an IRA. You also can't contribute an insurance policy to an IRA or roll a policy from an employer plan into an IRA. About the only way to get assets from an insurance policy to an IRA is to cash in the policy and contribute the money to the account. However, you'll have to treat the money as taxable income.