Roth conversion of variable annuity
Question:
Here is a case I am working on. Client is 65 has a variable annuity that has the following values:
Current annuity value: 18577
Income Account value 58519
Death Benefit 35910
Here are my questions:
1) If I convert to a Roth, what value will I pay tax on?
2) We are thinking of turning on the income stream 11/2009. Could we convert at $18,577 this year and start taking income next year that is tax free? Client can turn on income of $4101/yr for 20 years starting 11/2009.
3) Could we convert in 2009 and start taking income in 2009, or would we have to wait.
Considering different options, but it all depends on what value we have to convert at.
Sure appreciate some help.
thanks,
bruce
Permalink Submitted by Bruce Vangsnes on Sun, 2008-12-21 23:27
By the way, the annuity is out of the surrender period, so the annuity value is the value with no penalty.
Permalink Submitted by Alan Spross on Sun, 2008-12-21 23:43
I will assume this annuity is currently an IRA annuity.
Attached is a link to the IRS ruling on how the taxable fair market value of an annuity is determined when it is converted to a Roth IRA. There were abuses in this area that the IRS cracked down on about 3 years ago. I think the FMV is going to be well above the current cash value. The insurance company should be able to provide you with a quote on what their 1099R will show, in accord with the IRS requirements.
The tax handling of Roth distributions must also include any other Roth IRAs the client has. But if this is the only one, the Roth distributions would be tax free right after conversion unless distributions exceeded the fair market value (taxable amount) of the conversion before 5 years passed. After 5 years all distributions would be tax free. There is also no penalty since client is over 59.5.
http://benefitslink.com/taxregs/td9418.pdf