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I am 65. I plan to execute ROTH conversions over the next 10 years before I hit RMDs. Obviously, handling the taxes at the conversion is front and center, pay with cash on hand or take out from the conversion. I understand there is an option to ROTH convert into Fixed Indexed Annuities, where the bonus (15-18%) may cover the entire tax burden. The one I have looked at is a 5-year contract, then you can take the money and put it back into the market. I will not need to use the money for the foreseeable future (>20 years). Does anyone have experience with this type of product for ROTH conversions?
Good Sunday afternoon Charles,
Thanks for the link to an annuity product you are considering.
In an earlier comment I said I thought the best use of a FIA is for a good contractual guarantee. I also think another potential advantage are mortality credits which can provide a person who is looking for an income stream they can not outlive.
I am unclear how the annuity described in the flyer would provide you with needed contractual guarantees or provide you a potential needed mortality credits as you state All the money in a ROTH will go to heirs.
In your original post you express your concern about the conversion taxes when you write handling the taxes at the conversion is front and center.
The statement in the linked flyer “EBR can only be elected at product issue. Rider charge is 0.95% of accumulation value at each contract anniversary during the surrender charge period. This rider charge is considered a penalty-free withdrawal…” reads to me the insurance company is offering to credit a higher initial deposit to the annuity by you agreeing to additional annual expense charges.
I do not see anything in the flyer that changes the tax rules that when you convert an amount from your traditional IRA to your Roth IRA that will impact your year of conversion taxes to the federal and maybe your state income taxes. The annuity is simply being purchased within the Roth IRA and the elected EBR bonus offered is a feature in selling to get you to buy the annuity. You will be paying the same tax in the year of the conversion regardless of if you buy an annuity in your Roth or not.
Your concern expressed in your comment about how to fund long-term care when needed appears to me to be an area that a hybrid life/LTC insurance policy could address.
I hope my thoughts help in your decisions.
Best,
Bill
Below are a couple of links that lay it out. You can Google for more info. The one I looked into closely was from a broker who showed me ones from Athene, but I didn’t see links for that particular product.
I am in the fortunate position that I will never need the money in my current Roth IRA, or anything I end up converting. We ran every situation via Monte Carlo modeling, stressing it to both my wife and me that I will live to 100 years old. All the money in a ROTH will go to heirs.
The other 2 options for more conventional rollovers are to pay taxes with cash or from conversion funds. Yes, paying with cash on hand is more advantageous over the long term. I just have a hard time paying with cash on hand, when it can be used for other things in my life, including long-term care when needed.
CP_10RothConversion Flyer_39169ZPRT 4-25.pdf
(new) Editor: Why was my comment not accepted?
Hello Dan,
From my past experience with my posting comments to HD I know if I include more than one embedded link in my comment then my comment would disappear for a while waiting for moderation and approval from the volunteer editor. When I did have a post disappear for a while there would be a 404 notice flash on my screen after I hit the post comment button.
I know that Bogdan is young, an active CPA and still working full time. If he is still working with taxes in his professional capacity then the week leading up to the extended due date for filing individual tax returns, October 15, which typically was the busiest work period of the year for me before retirement, he likely has been unable to make time to moderate all HD comments as soon as they post. The editor may very well be burning his time candle at both ends and in the middle too.
That must be it, as I had two embedded links.
It is clearly best to pay the tax from a taxable account, referring to your comment about “ pay with cash on hand or pay with the conversion.” Read Effect #2 of Roth conversions on Mike Piper’s blog. Piper also spoke on the topic “Roth Conversions – A Deep Dive” at the Bogleheads conference last December, available on YouTube.
Otherwise, I look forward to learning more about Roth conversions into Fixed Income Annuities, and especially what the 15 – 18% bonus is about.
“Obviously, handling the taxes at the conversion is front and center, pay with cash on hand or take out from the conversion.”
I have read numerous investing articles over the years which do not recommend paying the taxes from the conversion.
Per AI: It is not recommended to pay taxes on a Roth conversion using funds from the conversion itself because it can result in less long-term growth, and less money available for retirement. Paying taxes from the retirement account because it removes the money from the account, preventing it from growing tax-free for your retirement. Instead, it is advised to use outside savings to pay the conversion taxes to preserve the full amount in the account for future tax-free growth.
It is recommended that investors pay the taxes with money from a savings or brokerage account, a part-time job, or other non-retirement funds. This allows the full converted amount to remain in the Roth IRA and benefit from tax-free growth for your retirement.
I personally am trying to convert as much as I can before I turn 70 and collect Social Security Security this allows you to pay taxes on the funds while your income may be lower, potentially minimizing the tax on Social Security benefits and avoiding required minimum distributions (RMDs) in retirement.
I am not a fan of FIA’s based on my past experiences with some tax clients. I have not personally owned an FIA as the idea of limiting the potential additional gain from an equity index does not fit into my retirement plan, particularity the portion of my plan related to assets held in our Roth accounts.
I would encourage anyone considering a fixed index annuity watch a video by Stan Hitchcox. My take is the best use of a FIA is for a good contractual guarantee. I do not know how you plan to use your Roth account, how the annuity being sold to you would fit into your retirement plan or the financial strength of the insurance company who will issue the annuity that you are considering.
Oh boy, be careful with this one. I assume that by a 5 year contract you are referring to the surrender period. That is fine, but it may not mean the 15-18% bonus is fully vested in 5 years; that could take several more years. Further, a bonus that large might have to be paid for with a lesser interest credit.
I’m on record defending FIAs as an alternative for some CD savers, others here on HD are not even that charitable toward the product.
Proceed with caution.
What’s the bonus. Not familiar.
The purchase of the FIA, say $100K, would receive a $15K to $18K bonus. Sounds great, but there are strings attached.