Which provision allows tax-free transfer between annuities?

• A. 1031 exchange
• B. 1035 exchange
• C. 401(k) rollover
• D. Roth conversion

Answer: (B)

The provision tested is the tax-free transfer option for annuities under a 1035 exchange. This allows you to swap one annuity (or a life insurance policy/endowment contract) for another without recognizing any gain or income at the time of the transfer, as long as the move is handled through the insurer and there’s no distribution to you. That means you can preserve the tax-deferred status of the funds and continue the contract’s tax deferral in the new annuity.

Why this fits: a 1035 exchange is specifically designed for moving between like-type contracts (annuities and life policies) without triggering taxes, which is why it’s the correct choice here.

Why the others don’t fit: 1031 exchanges apply to real estate, not annuities. A 401(k) rollover moves retirement plan funds between qualified plans or IRAs, but it isn’t a direct tax-free transfer between annuities. A Roth conversion changes tax status by moving funds to a Roth IRA and is generally a taxable event, not a transfer between annuity contracts.