Funding Annuities

In order for annuities monthly payments to be completely tax free would it be best to withdraw funds from a Roth IRA or to keep the annuity within the Roth IRA itself? This is the only source available for non qualified funding.
Thank you!



Sorry… I forgot to mention above that in this case the “annuity” needing funding is a pension program: the Colorado PERA program for state and local government employees.  Thanks.

Not sure what your question is. Are you making an initial choice of which PERA plan to contribute to?  Both the DC plans (401k and 457) include either pre tax or Roth deferrals. Or are you asking about your Roth IRA contributions options, and if you can purchase an annuity in your Roth IRA?  

I should ask this question differently since I now have learned that the Colorado PERA 401 a pension will not allow me to roll over Roth funds to pay my purchase cost for 7 years service credits.  I would like to fund this purchase with non-qualified money so my monthly retirement income payments will be tax-free.  So, could I:1.  Use Traditional IRA money for purchase and then do internal piecemeal Roth conversions over time?2.  If not, would there be any significant downside to cashing out two Roth IRAs and using those funds for the purchase?  Thanks!   

I don’t study public pension plans, and they do not provide much detail on their websites on the taxable payout portions of these pensions, but the non taxable portion of your pension should reflect the after tax portion of your contributions made, whether for service credit or not. The remainder adjusted for implied gains on these contributions before being paid out will be taxable.  I don’t know if these plans provide employees with their computations of the taxable/non taxable breakdown, but they certainly offer nothing in the way of explanation on their websites. So if you use payroll deduction to purchase credit or write a check, the portion of your total pension payout attributed to these contributions would be non taxable. If you cashed out a Roth IRA and then wrote a check, the added pension would be non taxable. If you rolled over another pre tax plan to purchase service credit, the additional pension payment would be taxable. I don’t think I would cash in a Roth IRA which will provide lifetime tax free gains to purchase service credit where the imputed gains in the plan will result in some portion of the extra credit being taxable. 

Thank you,  This is very helpful. Would your last statement hold true even if we assumed that income tax brackets could potentially significantly increase in the years ahead?  I know Roth funds are not an ideal funding source but I have no other non qualified funds to access.

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