Updated July 30, 2026. Quick answer: §1035 does one thing: it says “no gain or loss shall be recognized” on certain exchanges. That is a rule about tax. A surrender-charge schedule is a term of a contract — and when you exchange into a new contract you generally get that contract’s terms, including a fresh surrender period. The tax code has nothing to say about it in either direction, and nobody should tell you it does.
Two different rulebooks, and which governs what
| Question | Governed by | Answer |
|---|---|---|
| Is gain recognised on the exchange? | IRC §1035(a)(3) | No, for a permitted exchange |
| Does the basis carry over? | IRC §1035(d), ordinary basis rules | Yes — the gain follows you |
| Does the old surrender charge apply on the way out? | Your existing contract | Whatever it says. Leaving inside the schedule generally costs |
| Does a new surrender period begin? | The new contract | Whatever it says. A new contract generally brings a new schedule |
| Do riders carry across? | Both contracts | They do not travel. A guarantee you paid for over years can be left behind |
This is the single most useful sentence in the cluster. The statute is silent on surrender charges because they are not tax attributes. So the answer to whether a 1035 restarts the clock is not in the Code — it is in the two contracts, and it is answerable only by reading them. Anyone who answers it from the tax law is answering a question the tax law does not address.
The shape of the mistake this prevents. A tax-free exchange can still be an expensive one. Pay a surrender charge on the way out, start a new surrender period on the way in, and abandon a rider you had been funding for years — all without recognising a dollar of gain. “No tax” and “no cost” are different claims, and the first is the only one §1035 makes.
The honest way to evaluate an exchange, then, is to price the contractual side first: what leaving costs under the current schedule, what the new schedule commits you to, and what the riders on each side are worth. Only once those three are known does the non-recognition rule add anything — and what it adds is the ability to make the change without also accelerating the entire gain into one tax year.
The half of this decision that is not in the Code. The tax treatment below is statutory and applies to everyone. What it costs you to leave is contractual: the surrender-charge schedule and where you sit in it, any guaranteed withdrawal or income rider and what it is actually worth, and the death benefit. Those live in your contract and the annual statement, not in the law, and this site does not guess at them. Ask the issuer in writing for the current surrender value, the remaining surrender period, and the value of every rider — then the statutory side below tells you what the tax does to whatever is left.
Sources
IRC §1035(a), quoted verbatim in full, with §1035(b)(2) and the §1035(d) cross-reference to the ordinary basis rules. Retrieved from the United States Code, July 2026.
This states what the cited authority says about a non-qualified annuity — one bought with after-tax money outside a retirement plan — unless a page says otherwise. It is not tax, legal or investment advice. An annuity held inside an IRA or a qualified plan is governed by different provisions. This site states no surrender-charge schedule and no rider value, because both are terms of your particular contract rather than rules of law.