Roth conversions used to fund period certain annuity SPIA payment
I am working on a planning case for a client and was wondering if you could provide me with some re-assurance/clarity.
Client is 64 and I am looking to do a Roth Conversion. We would convert this year, and use the Roth to fund a 5 yr period certain payout annuity, with monthly payments beginning 01/01/2024. The converted amount would be 215k, and the monthly 5-year period certain payments would be $4018. My understanding is gains of Roth conversions are taxable if they are taken with-in the first 5 years of a conversion. I also understand the 5 year window begins on January 1st of the calendar year in which the conversion took place. The final relevant piece of information based on my understanding is that Roth distributions come out on a first in first out basis. Based on the above information, at the end of the 5 yr conversion window, the client would have received 192,864 from the SPIA payout. He wouldn’t actually have receiving any profit on his original investment until the 5th year of the SPIA payout (2028) which would be the 6th calendar year for conversion purposes.
Do you know if there are any special stipulations to the above rules when pertaining to annuitized on period certain only calculations or do you see any flaws in my logic?
Permalink Submitted by Alan - IRA critic on Mon, 2023-06-05 23:48
Assuming this conversion is the first Roth contribution of any type for this client, your understanding of the Roth IRA ordering rules is correct. Earnings come out last, only after 215k has already been distributed. The Roth will be qualified and fully tax free on 1/1/2028, therefore the rest of the distributions will also be non taxable. The Roth IRA ordering rules trump any annuity distribution rules for tax purposes. Form 8606 will be needed to report distributions through the end of 2027 only.
Permalink Submitted by Richard Fritts on Mon, 2023-06-05 23:58
The client currently has a Roth valued at 67k. I’m not sure how it was funded but it has been open since 2016 at minimum. This will actually be part of the 215k SPIA funding. Based on this.. I presum the entire distribution on the SPIA will still remain tax free.
Permalink Submitted by Richard Fritts on Tue, 2023-06-06 00:53
I read that qualified Roth distributions do not count toward income when determining elegibility for Health Insurance Premium Credits from the market place under the Affordable Health Care Act. My question is, assuming all the SPIA Roth withdrawals are non-taxable, would the withdrawals be considered qualified withdrawals? In other words, would they count toward elegibility of premium credits?
Permalink Submitted by Alan - IRA critic on Tue, 2023-06-06 00:59
Yes, the Roth is therefore already qualified, so the annuitized distributions could start immediately, and an 8606 would not be needed at all. Perhaps client needs these distributions to cover expenses, but otherwise the downside is the loss of the Roth balance in the next 5 years. To prevent that client could simply purchase a Roth fixed annuity if current funds are not needed.