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I am beginning to develop a ROTH conversion strategy. I am 65 and have 10 years before RMDs kick in. I see various people/organizations talking about using Fixed Index Annuities as a vehicle for ROTH conversions. As I understand it, the insurance company will give you an immediate cash bonus up front when you set up the annuity. This bonus could typically be 15-20% of the actual amount you set up to be rolled over. The pitch is that the cash bonus will pay from the conversion taxes, so you do not have to pay for the taxes out of your capital. Has anyone looked into these and used this technique?
I tried to do a little research on this, and found it confusing. It certainly appears that the devil is in the details. Some the concerns I found were:
1) The bonus is part of the taxable conversion, thus increasing the tax. Several sources seemed to imply that the bonus rarely covered the tax.
2) The bonus was essentially part of the FIA’s return, and lowered the actual growth of the annuity.
3) The usual concern about confusing fees, withdrawal charges, and restrictions.
Yes, I have heard of FIA more recently. I have dabbled in SPIA/DIA (“term certain” kind), how I established a stable monthly “paycheck” which is not subject to market volatility. I would (and am) looking at FIA and my (limited) understanding is that these can be good to setup a lifetime paycheck (NOT term certain) for self & spouse using a small portion from my existing IRA (which would make it a qualified annuity). And they have features that on paper look to be better than a SPIA/DIA. A qualified FIA from IRA would count toward RMD (assuming you defer payments till when you reach 65) and this is what I am (and would) potentially explore. And in this case strictly in lieu of the DIA.
BUT I would question why would one need this as a vehicle for Roth conversion. That wouldn’t make sense to me. I would do a small amount (how small depends on your current tax bracket and how much of a tax hit you want to take) of direct Roth conversion each year until RMD.
Charles, you will rarely get a positive response on HD to any question related to annuities.
With that said, I’m sharing my take on your question, as a person who 1.) Authored/Edited textbooks on Annuities , during my 15 years as a college professor, teaching in Financial Services Professional Education curricula 2.) Owns FIAs 3.) Is happily receiving tax-free income from my Roth IRA Funded annuities.
Bonuses on FIAs are not “free money.” Bonuses on FIAs cannot be used to pay the taxes due on conversions. Any upfront bonus dollars credited to your account will vest, usually over a 10-year period. That vesting period, in and of itself, is not necessarily negative, as it helps you stick to the commitment to stay invested, which is the purpose of long-term annuities. However, the insurance company giving you bonuses will lower some other feature of the annuity…participation rates, cap rates, etc., to fund the up-front bonus.
With that said, doing Roth conversions to purchase annuities for your retirement deserves your attention and consideration if you are a “safety first” investor.
I am 10 years older than you, and I retired at age 73 and 4 months. I “turned on” my annuities’ income streams in 2024 (2 of them) and 2025 (the other two of them). My wife and I are receiving $36,562.00 in annuity income, added to our $73,340 in Social Security Benefits. (I waited until age 70 to file for my Social Security, to maximize benefits for my wife, who is 4 years younger than me.) This guaranteed joint life income, which is almost twice the amount of our retirement expenses annually, allows us to keep our invested portfolio in equities, maximizing our returns and future legacy for our children. Since we do not need to spend down this portfolio for income, we are free to do so, and since we do not need further fixed income, we do not need to hold bonds in our portfolio.
As far as our RMDs are concerned, our annual RMDs are used to fund QCDs. In your case, however, when your RMDs do kick in, the dollars you converted to Roth will no longer be included in the amount upon which your RMDs are calculated.
Good Luck with your planning, and remember, opinions are like belly buttons, everyone has one, but only yours matters!
Just do pure Roth conversions in December each year when you have a good handle on your tax situation for the year. Rule of thumb: convert to the top of your 12% tax bracket for sure and perhaps higher after you’ve shown higher will work for you.
You don’t need specialized “assistance” to do this.
For the truly enamored who can afford the tax hit now, convert to the top of the 22% bracket or perhaps even higher if one is very well heeled. Two benefits – 1) reducing the size of the tIRA and 2) good growth of the Roth account assets.
I follow a general rule of thumb that no one does anything purely for my benefit.
Charles, I’m not as negative about FIAs as most of the HD people. I think they can be an alternative to CDs for risk adverse savers that won’t invest in the market. BUT. If the insurance company is giving you money up front, then they are making up for it via smaller caps on interest rates, longer surrender periods, or both.
The people who sell FIAs do not have to be securities licensed and are not fiduciaries. I would not employ the strategy being proposed by the salesman.
I get the heebie-jeebies when I hear the “A” word.
I haven’t heard about this, but it sounds like some cockamamie scheme cooked up by insurance salespeople to earn a fat commission. I’d back slowly toward the door and start running like hell.