Roth conversion of traditional IRA annuity
Recently converted a tradition IRA annuity to a roth IRA. We were notified by the carrier that the 1099 distribution amount will be reported as the full accumulation value and not the surrender value. Contract owner is insisting that only the surrender value should be reported. Any answers?
Permalink Submitted by Bruce Steiner on Thu, 2011-07-07 18:00
Recharacterize the Roth IRA back to a traditional IRA, then cash in the annuity for the surrender value, then (when you become eligible to convert again) convert the IRA (now invested in assets other than the annuity) to a Roth again.
Permalink Submitted by Alan Spross on Thu, 2011-07-07 18:24
In 2005 the IRS shut down a number of Roth conversion schemes designed to depress the taxable value on the 1099R while transferring various fringe benefits to the Roth annuity. After August, 2005 annuity issuers were no longer allowed to show the surrender value on the 1099R. They are required to calculate the value of the entire amount transferred and the result is that the 1099R will show an amount considerbly in excess of the cash surrender value in many cases. Here is the IRS Release TD 9418:
http://benefitslink.com/taxregs/td9418.pdf
As Bruce indicated, the conversion can always be recharacterized back to the TIRA if the taxpayer does not find the tax bill acceptable for the contract including the fringe benefits in the Roth IRA. I suppose if the IRA owner is in very poor health and the annuity is far enough underwater, an inherited death benefit in a Roth IRA would benefit the beneficiary.
In any event, the contract owner would have been correct until 2005, but the carrier is correct now.