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dschindler1
New Member

How should an insurance roll-over be treated?

We closed an insurance policy and used the all of the cash value to purchase another insurance policy. How do we account for this on our taxes since this should be a roll-over and not income?

1 Reply
HelenaC
New Member

How should an insurance roll-over be treated?

Your administrator would need to do a 1035 exchange to transfer your original insurance policy to your new insurance policy. The tax code says that the old insurance policy must be exchanged for a new policy—you cannot receive a check and apply the proceeds to the purchase of a new insurance policy.

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 - IRS.gov 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?

 

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