Roth Conversion and Fixed Annuities
How does the 5 year clock work when a conversion is involved?
Example: I open a Roth in 2009 for a relatively small amount of $5,000. In 2010, I convert a Traditional IRA to a Roth in the amount of $800,000. I am 67 years old in 2010. Does my 5 year window for the conversion amount end in 2014 or 2015?
2) If I have a fixed annuity inside my Traditional IRA, and convert to a Roth in 2010? What are the consequences in the annuity? Can a Roth have an annuity in it? I am over 59 1/2 years old.
Thanks
Ed Lustberg
Permalink Submitted by Alan Spross on Fri, 2009-04-10 23:59
1) The 5 year conversion holding period no longer applies after age 59.5. However, the separate 5 year holding period for the entire Roth to be qualified for tax free earnings begins 1/1/2009 if that 2009 regular contribution was your first Roth contribution of any type.
2) Any type of IRA can include an annuity in various forms. A TIRA annuity can be converted to a Roth IRA providing that the insurer is willing to transfer the records. The IRS passed some rules regarding the conversion of variable annuities a couple years ago that established valuation criteria recognizing the value of the fringe benefits in the VA, such as death benefits far in excess of the current contract value. However, for a fixed annuity the contract value would serve as the taxable amount for a Roth conversion of the fixed annuity.
A TIRA or Roth annuity can be annuitized at any point as a life annuity or joint life annuity with a spouse. There are other options as well. With a custodial account, the annuity payout can be made into the IRA without a distribution. This would mean that a Roth lifetime annuity could continue to pay out into the Roth with no distributions because the Roth has no RMDs. For a TIRA annuity, a lifetime annuity distributed annually would meet the RMD requirements of the TIRA.
Permalink Submitted by charles lore on Sat, 2009-04-11 13:44
If the ROTH contribution you make in 2009 is designated for tax year 2008 then the clock for 5 yr rule starts way back on Jan 1 , 2008. You have a few days left to do this.
Permalink Submitted by Edward Lustberg on Mon, 2009-04-13 05:54
Thanks!