Annuitizing ROTH IRA Assets
If I wish to annuitize all or a portion of the assets in my long held (over 5 years) ROTH IRA, do I purchase the annuity inside the ROTH IRA and have the annuity payments made to the ROTH IRA (taking a distribution form the IRA if I want access to the payments), or do I have the annuity payments made directly to me? It seems that if the payments come directly to me, they are not ROTH distributions that are tax free but rather annuity payments subject to the recovery rules of section 72 of the Internal Revenue Code covering annuity payments, which would mean that they would be partially taxable to the extent they exceed the annuity exclusion ratio under that section. But if they are made to the IRA, they are all excluded from income. Am I complicating this too much, or is there a difference?
Permalink Submitted by Alan - IRA critic on Sat, 2023-01-28 15:49
Annuities in an IRA follow IRA distribution tax rules, not the Sec 72 annuity rules. All distributions from a Roth IRA come first from your Roth IRA contribution basis (tax and penalty free). Taxable earnings come out last and will be taxable until your Roth IRA is qualified. To purchase an annuity in a Roth IRA, the amount of the annuity purchase would normally be directly transferred to an IRA annuity at an insurance company. While this would be a separate Roth IRA account, all your Roth IRA accounts are treated as combined for purposes of distribution reporting on Form 8606. Amounts paid out of either Roth are reportable distributions, and you can only roll back one such distribution over a 12 month period. Therefore, there should be a demand for insurance companies to arrange for the direct transfer of annuity payouts to another Roth IRA, but it is challenging to find an insurance company that will cooperate in such an arrangement. Perhaps this is because few people actually annuitize IRA accounts. Ask this question of your insurance company, otherwise your Roth IRA will be slowly depleted by the annuity payouts.