Distributions from Fixed Index Annuity within Roth IRA

Submitted by Scott Gorham on Thu, 2014-07-10 20:09

I have a client who is 54 years old. He has Fixed Index annuities inside his Roth IRA’s. Roth IRA’s opened 3 years ago.
If he starts distributions from his annuity at age 55, using an income rider.

What are the tax ramifications? There would be a penalty for early withdrawals before age 59.5? Or because it is coming from a Roth IRA , no penalty?

Can you do 72T withdrawal from a Roth IRA? Therefore tax free. I think a 72T does not applt to a Roth IRA.

Withdrawals from annuity would be pro rated with principal and gains. But does this come into play with distributions from a Roth IRA?

Suggestions on how to take distributions in the above situation?

Thank you.



Submitted by Alan - IRA critic on Thu, 2014-07-10 22:14

  1. Roth distribution tax rules trump the annuity tax rules when the annuity is held in a Roth IRA. Therefore, the Roth ordering rules would apply with regular contributions out first. All his Roth IRAs are combined if he has more than one, so if he limits his distributions to his regular Roth contributions, there is no tax or penalty. Conversions come out next with the oldest first, but conversions not held 5 years are subject to 10% penalty until age 59.5.
  2. A 72t plan can be done using a Roth IRA, but there is no need to start such a plan until client has already used up the regular Roth contributions and conversions over the 5 year holding period. If started at that time, the 72t plan would waive the 10% penalty on Roth conversions less than 5 years old and on any earnings. At 59.5 the Roth will be qualified and the entire balance will be tax and penalty free. It probably is not worth starting a rigid 72t plan that will have to last at least 5 years unless the amount subject to penalty will be large enough to warrant it.

Add new comment

Log in or register to post comments