Roth converstion
Can a client convert his traditional IRA to a Roth and place the investment into a Fixed Index Annuity and then the next year remove some of the money (not gains) out of the annuity without having to pay any taxes? Traditional annuities are last dollar in is first dollar out, so I am not sure. The client does not have a current Roth and if money is needed, normally he can take out contributions, just not earnings per what I believe.
Permalink Submitted by Alan Spross on Tue, 2010-03-30 23:14
When an annuity is in an IRA, the IRA tax rules apply and trump the annuity tax rules. But in the case you posted here, there are 3 areas of concern:
1) The annuity itself may have a surrender charge, separate from IRA rules
2) Return of conversion dollars within 5 years unless IRA owner is 59.5 incurs a 10% early distribution penalty
3) For 2010 only, a conversion in which the income is to be reported in 2011 and 2012 cannot be distributed prior to 2012 without accelerating the year the conversion income is reported. The taxable income for the distribution year would be added to the income that would otherwise be reported in the year of distribution.
Example, first Roth contribution is 50k conversion in 2010.
1) Distribution of 15k in 2011 would result in 2011 income reported of 25k plus 15k plus 10% penalty on 15k if Roth owner is not yet 59.5
2) 2012 reported income would be 10k.