Can You Get Out of an Annuity? What You Need to Know About 1035 Exchanges

The Short Answer : Can You Get Out of an Annuity?
Yes—most annuities can be repositioned, even if you’ve held them for years. One option is a 1035 exchange, which allows you to transfer funds to a new annuity or certain insurance products without triggering taxes. The right choice depends on your goals, and we recommend always consulting your tax advisor and a fiduciary financial advisor on these matters.

If you’ve ever purchased an annuity, chances are it was for peace of mind: maybe to protect your principal, guarantee income, or weather market volatility. Those decisions made sense at the time.  

But as life changes, so do your financial goals. What once felt like a smart move can become a blind spot in your broader wealth strategy. 

We see this often at Plancorp: new clients come to us often with a significant portion of their net worth locked inside an annuity they rarely think about. 

The question isn’t whether that annuity was a mistake; it’s whether it still serves your goals today, and if not, how you can get out of it. 

Can You Get Out of an Annuity? 

Many people assume they’re stuck with an annuity forever, but that’s not the case. In reality, most clients tell us they purchased it years ago and now aren’t sure why, how it works, or even how it’s invested. 

While annuities are designed for long-term commitments, there are strategies that allow you to reposition these assets without triggering unnecessary taxes or penalties. 

That’s where a 1035 exchange can help. This tax-efficient strategy may allow you to reposition annuity assets without immediate tax consequences, if executed correctly, helping to create flexibility and alignment within a holistic financial plan. 

However, a 1035 exchange isn’t the only path forward (more on that later). The key is understanding your options and working with a fiduciary advisor who can evaluate what’s best for your unique situation. 

What Is a 1035 Exchange? 

A 1035 exchange refers to Section 1035 of the Internal Revenue Code, which allows certain insurance products to be exchanged for similar products without triggering a current tax liability.  

Most commonly, this involves transferring funds from one annuity to another while maintaining the tax-deferred status of any accumulated gains. 

A 1035 exchange is not a withdrawal or liquidation. The assets move directly from one provider to another, preserving tax deferral and avoiding recognition of income at the time of transfer.  

This mechanism creates planning flexibility, particularly for those whose financial circumstances have changed since the annuity was originally purchased. 

Key benefits of a 1035 Exchange: 

• Preserves tax-deferred status 

• Enables portfolio integration 

• Offers estate planning flexibility 

Why Annuities Often Surface When Hiring an Advisor 

When new clients first engage with a financial advisor, the initial planning process often reveals assets that have been managed in isolation. Annuities are a frequent example. 

Many clients assume these assets are locked away or disconnected from their broader financial strategy, which can create blind spots in achieving long-term goals.  

Others are unaware that, depending on the structure, annuity assets may be eligible to be managed alongside their broader portfolio once repositioned appropriately. 

From a planning perspective, this matters. Assets held outside a coordinated strategy can make it more difficult to manage risk, evaluate exposure, or align investments with long-term goals.  

A 1035 exchange may allow annuity assets to be integrated into a holistic wealth management plan while maintaining tax-efficiency. 

Annuities Are Not Inherently Problematic 

Not every annuity needs to be replaced. The real question is whether it still supports your goals today and in the future. 

Certain annuities offer benefits that remain relevant, such as guaranteed income features or downside protection. In those cases, retaining the annuity may be entirely appropriate. 

A fiduciary review does not begin with an assumption that an annuity should be replaced. Instead, it asks a more nuanced question: Does this product still support the client’s current objectives, given the rest of their financial picture? 

Top Reasons to Use a 1035 Exchange 

While each situation is unique, several reasons tend to emerge when evaluating whether a 1035 exchange makes sense. 

Investment Alignment and Flexibility 

Older annuities may offer limited investment options or conservative allocations that no longer align with a client’s overall portfolio. Over time, this can create unintended imbalances or reduce growth potential relative to the client’s long-term objectives. 

A 1035 exchange may provide access to a structure that allows for greater integration with an intentional asset allocation strategy. 

Cost and Complexity 

Internal fees, riders, and product limitations can become less attractive as a client’s wealth grows and planning becomes more sophisticated. While costs alone are not a sufficient reason to move an annuity, they are an important part of a holistic evaluation. 

Simplifying the number of financial “moving parts” can also make ongoing planning more efficient and transparent. 

Estate Planning Considerations 

Annuities often become a focal point when clients revisit their estate plan. 

Depending on how an annuity is structured, passing it to the next generation can introduce complexity, including accelerated taxation for beneficiaries and challenges coordinating with trusts or broader legacy goals. 

While a 1035 exchange can help reposition annuity assets within a broader plan, it doesn’t solve every estate planning concern. That’s why having an advisor involved is critical. They can make sure beneficiaries are named appropriately (for example, avoiding common mistakes like listing a trust when it may not be ideal) and handle the distribution process after death, so you’re not relying on a call center. 

Already Have an Advisor? 

Even if you already have an advisor, annuities still deserve attention. Priorities change—legacy planning, charitable giving, or supporting future generations—and assets that once felt minor can suddenly matter. Reviewing an annuity isn’t just about chasing returns; it’s about making sure every piece of your financial picture works together. 

Revisiting an annuity through the lens of a 1035 exchange is often less about improving returns and more about reducing friction in the plan as a whole. 

The Role of a Fiduciary Advisor 

A 1035 exchange requires a fiduciary review to ensure alignment with your goals. Guarantees may be forfeited. Surrender schedules must be reviewed. Tax implications need to be clearly understood. 

At Plancorp, recommendations around annuities are made within a fiduciary framework that prioritizes the client’s best interest. That includes documenting why a change is appropriate—or why maintaining the existing structure is the better decision. 

When a 1035 exchange is recommended, it is because it supports the integrity of the overall plan, not simply because it brings additional assets under management. 

A More Coordinated Financial Picture 

For many clients, the greatest benefit of a 1035 exchange is clarity. Assets that once felt disconnected become part of a cohesive strategy. Estate planning decisions become easier. Ongoing portfolio management becomes more intentional. 

Not every annuity should be exchanged. But every annuity deserves to be reviewed in context. 

Is a 1035 Exchange Your Only Option? 

While a 1035 exchange is often a powerful tool for repositioning annuity assets, it’s not the only solution. Depending on your goals, other strategies may include: 

• Adjusting allocations within your current annuity 

• Partial withdrawals or systematic payouts 

• Surrendering the annuity (with careful review of fees and tax implications) 

• Incorporating the annuity into your estate or charitable giving plan  

The right choice depends on your broader financial picture.  

Final Thoughts 

If you purchased an annuity years ago, now is the time to ask: does it still align with your vision for financial independence? A fiduciary review can help you answer that with confidence and determine if a 1035 exchange is right for you. 

Curious how this applies to your plan? Schedule a 30-minute call with a Plancorp wealth advisor to explore your options.