Coverted Roth tax treatment in VA with Living Benefit
Scenario: Investor converts Traditional IRA VA with guaranteed minimum income benefit to Roth and the value is $10k at the time of the conversion. Pays tax on $10k. Value fluctuates over time both up and down. GMIB value five years later is $15k. Value of the contract is now $11k. Investor meets 5 year/59 1/2 rules to qualify for tax-free withdrawals. Investor triggers GMIB, chooses 10 year period-certain payout and receives 10 years of annual payments based on GMIB value of $15k. Are the payments 100% tax-free?
Permalink Submitted by Alan Spross on Thu, 2009-07-23 17:32
Yes, once the Roth is qualified, all future distributions are tax and penalty free. The only pitfall with converting annuities is determining the value at conversion which now includes consideration of fringe benefits, not just the surrender value of the annuity at the date of conversion. New Regulations were put in place about 3 years ago, but since this conversion took place prior to that, it is unlikely that there will be any question about the conversion value of 10,000.
The only question now is whether the annuity payout will be done as a Roth distribution (tax free) or if the annuity is held in a custodial account under which the annuity could be paid out and still be retained in another investment within the Roth. That would allow these benefits to continue to grow tax free without RMDs. However, there is no question about the tax free status if these payments are distributed. 1099R should be coded as “Q”, meaning that an 8606 would not be needed with the tax return. The payout could just be entered on line 15a with -0- on 15b.