Variable Annuity in an IRA conversion to a Roth IRA
I have a client that wishes to take a partial withdrawal from their existing qualified variable annuity in an IRA and convert it to a Roth IRA. Does the client need to first transfer the withdrawal to an IRA and then convert? Or can they transfer it directly to the Roth?
I’ve been reading from other sources that they need to do the transfer first to the IRA and then convert. But I can’t understand why that would be. In either case the Roth IRA is just getting a check/funds from the previous IRA trustee/custodian.
Permalink Submitted by Alan - IRA critic on Wed, 2024-12-18 18:04
This position is not related to any IRS rule, but it might be an insurance company requirement. Perhaps they are not comfortable reporting a conversion. But if the cash must be transferred to a non annuity IRA, the taxpayer should be sure that it is done by direct transfer so it is not subject to the one rollover limitation.
Some IRA Annuity owners might wish to actually convert their annuity to a Roth IRA annuity. That would require the insurance company to do a complex calculation of the value of the IRA annuity including certain fringe benefits and to report this value on a 1099R. But converting a cash withdrawal from the annuity would not require such a calculation as the conversion would be in cash.
If the conversion was initiated through the Roth IRA custodian, it may not be clear whether the conversion was to be in cash or a portion of the annuity.
Permalink Submitted by John Foster on Wed, 2024-12-18 19:51
Is it the receiving company that holds the Roth IRA who would report the conversion or the Insurance company that distributes via direct transfer that reports the Roth conversion?
Permalink Submitted by Alan - IRA critic on Wed, 2024-12-18 21:08
The insurance company would issue the 1099R if the conversion is done directly to the Roth IRA.
If the insurance company does a non reportable direct transfer to an IRA and you convert from the IRA, the IRA custodian will issue the conversion 1099R and there will be no 1099R from the insurance company.
The Roth IRA custodian will issue a 5498 in May of the following year showing receipt of a conversion contribution that will match the amount on the 1099R.
Permalink Submitted by John Foster on Thu, 2024-12-19 12:07
Since we’re quickly approaching end of year and checks are mailed from the annuity company to the advisory company with the Roth IRA. The question is what is the timing of what has to happen for the Roth conversion to be for 2024.
Is it soley when the money leaves the annuity company and they send out a conversion 1099R for 2024. Or does the receiving custodian also have to record the deposit by 12/31/2024?
Permalink Submitted by Alan - IRA critic on Thu, 2024-12-19 13:35
Only the distribution needs to be completed in 2024, which would generate the 1099R and the conversion will be taxable in 2024. The deposit to the Roth IRA does not have to be completed in 2024.