ROTH Conversion
A client’s employer invested 3,000 for him in a VA IRA (traditional) but now that he’s separated from the co. wants to convert to a ROTH IRA With a mutual fund.
The value is now only 2100 appro.. He wants to know if he will only have to taxes on the 2100 or the full
3,000?
Permalink Submitted by Anonymous (not verified) on Wed, 2010-01-27 18:23
I am guessing “VA” means Variable Annuity?
The current value will be used for the conversion. If the client did not deduct the IRA contribution and that is his only IRA, the conversion will cost him/her no extra tax. Otherwise pro-rarta or full taxation.
I would also beware of some stiff penalties by the issuer of the annuity product (they may take 7 years to level off).
pmk
Permalink Submitted by Al Fry on Fri, 2010-01-29 04:32
Most annuity companies will simply make the same contract a Roth. There is no need to surrender it to do a Roth conversion.
Permalink Submitted by Alan Spross on Fri, 2010-01-29 06:14
Note that there are very complex IRS Regs since 2005 to determine the taxable amount in a Roth conversion of a VA IRA contract. The actuarial value of the fringe benefits must be considered, and if they exceed a minimum % of the surrender value, the higher amount will be shown on the 1099R. The insuror should be requested to supply that figure in order to avoid surprises.
The IRS got into this issue in 2005 due to various Roth fraudulent conversion schemes to convert IRA annuities at depressed valuations.