Roth Conversion
Client owns a TIRA with stocks , mutual funds and a variable annuity. Mkt values of all are down significantly from purchase price . Client wants to start converting to a ROTH and is eligible. Are there any issues with choosing the variable annuity?
Let’s say the annuity is valued at 40,000 and DB is currently 100,000. I am concerned about some sort of a “springing value rule” I may not be aware of. Client in theory could convert, pay tax on 40,000, die and then have 100,000 in ROTH. How would answer change if client was terminal and given a year to survive?
Lastly between the three , stocks , funds and annuity, is there any particular one that would make the most sense to covert if he had to choose only one?
Permalink Submitted by Alan Spross on Tue, 2008-10-28 01:31
Chuck,
Yes, there are issues in converting an annuity to a Roth IRA. The valuation at conversion is the fair market value of the annuity, not the cash surrender value. The original date of the IRS Notice on this was August, 2005. See the following link:
http://www.irs.gov/irb/2006-03_IRB/ar15.html
The calculution is complex, but the insurance company must develop the appropriate figure. While there is a de minimum amount under which the value will not be increased, it is advisable to get the figure before incurring taxation from converting an annuity. Because of the valuation requirements, there is no requirement that the client live a certain period following the conversion.
A conversion of in kind assets obviously works most efficiently if the assets with the best growth potential are converted. Determining that is problematic and heavily dependent on the time horizon. Some conversion strategies call for converting different assets into different Roths and then recharacterizing all but the best performing asset. Of course, there is no reason that your conversion amount could not be composed of equal shares of various assets if you do not want all your eggs in one basket. Some people just convert a MM fund, then buy what they want in the Roth, and the effect is the same, except for a small commission cost.
Permalink Submitted by charles lore on Tue, 2008-10-28 01:51
Alan the annuity I am referring to is your typical deferred variable annuity that holds “mutual funds” in sub accounts, and has a step-up death benefit based on quarterly ratchets . Client owns it becasue of DB feature . Upon death this sum is simply paid to IRA. Obviously a choice of annuitization is available .
With this additional information is your answer the same and is the irs link you sent still applicable?
Permalink Submitted by Alan Spross on Tue, 2008-10-28 03:38
Yes, still applicable. Here is another article on this written by Ed:
http://www.financial-planning.com/asset/article/527395/ending-annuity-sc…
Permalink Submitted by Al Fry on Thu, 2008-10-30 02:19
If the only additional benefit on the annuity is ROP (Return of Premium at death), the value for taxation is probably the account value. At least for RMD purposes, ROP is considered to be a de minimus benefit. The annuity carrier shoiuld give you the FMV for Roth conversion taxation, since they have to issue the 1099-R.