1035 Exchange Compounding

 

A 1035 exchange allows an investor to continue deferring payment of income taxes on an annuity, further increasing investment returns.

Similar to the example of tax-deferred compounding, this example goes one step further to illustrate the increased benefit obtained by rolling over an investment via a 1035 exchange.

Example Showing the Benefit of a 1035 Exchange

The example below illustrates the returns generated by investing in a 10 year annuity and then rolling over the investment for an additional 10 years utilizing a 1035 exchange.


Assumptions Used in this Example

  • Initial investment of $10,000.
  • Initial investment period of 10 years.
  • Annual interest rate of 5%.
  • The investor's marginal income tax rate is 33%.
  • Subsequent investment period of an additional 10 years.

Results for Annuity Investment

 

Interest Earned

Income Taxes Paid

Investment Balance

Initial Investment

-

-

$10,000.00

Year 1

$500.00

-

$10,500.00

Year 2

$525.00

-

$11,025.00

Year 3

$551.25

-

$11,576.25

Year 4

$578.81

-

$12,155.06

Year 5

$607.75

-

$12,762.81

Year 6

$638.14

-

$13,400.95

Year 7

$670.05

-

$14,071.00

Year 8

$703.55

-

$14,774.55

Year 9

$738.73

-

$15,513.28

Year 10

$775.66

-

$16,288.94

1035 Exchange

-

-

$16,288.94

Year 11

$814.45

-

$17,103.39

Year 12

$855.17

-

$17,958.56

Year 13

$897.93

-

$18,856.49

Year 14

$942.82

-

$19,799.31

Year 15

$989.97

-

$20,789.28

Year 16

$1,039.46

-

$21,828.74

Year 17

$1,091.44

-

$22,920.18

Year 18

$1,146.01

-

$24,066.19

Year 19

$1,203.31

-

$25,269.50

Year 20

$1,263.48

-

$26,532.98

Withdraw Funds

-

$5,455.88

$21,077.10

Total

$16,532.98

$5,455.88

$21,077.10


Results for Alternative Investment Without Tax Deferral

 

Interest Earned

Income Taxes Paid

Investment Balance

Initial Investment

-

-

$10,000.00

Year 1

$500.00

$165.00

$10,335.00

Year 2

$516.75

$170.53

$10,681.22

Year 3

$534.06

$176.24

$11,039.04

Year 4

$551.95

$182.14

$11,408.85

Year 5

$570.44

$188.25

$11,791.04

Year 6

$589.55

$194.55

$12,186.04

Year 7

$609.30

$201.07

$12,594.27

Year 8

$629.71

$207.80

$13,016.18

Year 9

$650.81

$214.77

$13,452.22

Year 10

$672.61

$221.96

$13,902.87

Rollover Investment

-

-

$13,902.87

Year 11

$695.14

$229.40

$14,368.61

Year 12

$718.43

$237.08

$14,849.96

Year 13

$742.50

$245.03

$15,347.43

Year 14

$767.37

$253.23

$15,861.57

Year 15

$793.08

$261.72

$16,392.93

Year 16

$819.65

$270.48

$16,942.10

Year 17

$847.11

$279.55

$17,509.66

Year 18

$875.48

$288.91

$18,096.23

Year 19

$904.81

$298.59

$18,702.45

Year 20

$935.12

$308.59

$19,328.98

Withdraw Funds

-

-

$19,328.98

Total

$13,923.87

$4,594.89

$19,328.98


The results show that utilizing a 1035 exchange to further defer the payment of income taxes can further increase the return generated by an annuity investment relative to an alternative investment without tax deferral.

 

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