Roth Conversion and use of IRA funds to pay the tax
I know that it is generally advised not to do a Roth conversion is you have to use IRA funds to pay the Federal Taxes. But I wonder I my situation is an exception.
I have a variable annuity IRA which in 2018 I can cash in. The guaranteed minimum value in 2018 is over double today’s value.
Our current income is from pensions, social security and the rest from retirement investments (mostly withdrawals from a non IRA annuity although some from IRAs).
So the Roth IRA conversion taxes would come from our ‘pool’ of income sources and a small portion of that pool is from IRAs. Should that be a reason for not doing the conversion to ROTH?
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Permalink Submitted by Alan Spross on Wed, 2009-11-11 20:34
No, assuming that you are not paying any early withdrawal penalty on the IRA distributions. If there is no such penalty, all you are doing is using your IRA for a small portion of the taxes used to make your Roth balance relatively larger than your TIRA balance.
So the real question is whether your funds are better off in a Roth than a TIRA, and that gets back to the complex question of how much of your retirement assets should be converted and whether the cost of conversions will be too high in relation to your average expected tax cost over all years of retirement.
There is no sense in paying the entire conversion tax bill out of after tax funds if it will drain those funds and make you take later IRA distributions to live on. If your relative balance of TIRA funds is too high in relation to taxable assets and Roth assets, and if no early withdrawal penalty will be paid, paying the tax from a TIRA is not that bad, especially when it is only a small part of the tax bill. The main issue is whether the converted amount itself is appropriate for long term needs.
Since you essentially have a guaranteed 8% yield on the VA IRA through 2018, I assume you are not touching that IRA (unless possibly to convert it). It might be wise to get a quote on the taxable amount of a conversion on that annuity. The insurance companies now have to compute the taxable amount of an annuity conversion recognizing the value of certain fringe benefits, but if that value is low enough, then collecting the 8% in a Roth IRA Annuity could pay off.