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Q&A: Can I Utilize the 1035 Exchange Provision for an Annuity I Inherited?

Retirement Accounts Tax

Question:

Can I Utilize the 1035 Exchange Provision for an Annuity I Inherited?

Answer:

Yes, you can...provided this is a non-qualified inherited annuity and not an annuity in an inherited IRA. An annuity in an inherited IRA would just be liquidated with the proceeds directly transferred to another inherited IRA.

In 2013, the IRS issued PLR 201330016 which opened the door to a Section 1035 tax-deferred exchange at the inherited annuity level. While that is a Private Letter Ruling (PLR) pertaining to one individual case--and the IRS is not bound to follow it in every situation--there's little reason to expect they won't continue applying the same principles. And various insurance companies have been relying on it in allowing in-bound 1035 exchanges.

One other thing...if you currently have Required Minimum Distributions (RMDs) set-up to stretch over your lifetime, you'll almost certainly have to continue the same uninterrupted distribution arrangement with the annuity you're transferring to.