Annuities IRA annuity used to do ROTH Conversion

Submitted by Douglas Magers on Fri, 2016-07-22 15:53

I have a client who has an IRA annuity with Allianz, with a GMIB rider. The rider is worth $154,000 while the cash value is worth $84,000. The client does not need income but would like to capitalize on the large difference between the cash value and the GMIB. The best income scenario is to take a guaranteed 10 year payout, but I am trying to avoid making the full distribution taxable. The client is 74 years old and taking RMD’s. I would like to propose annuitizing the annuity and putting the difference between the distribution amount and the RMD into a Roth IRA as a conversion. Can you please advise if this is possible, and if so the best way to do this?



Submitted by Alan - IRA critic on Fri, 2016-07-22 17:17

  • Any change to the annuity contract other than Roth conversion can be done by a non reportable TtoT transfer and not affect the RMD. But a Roth conversion of the annuity or part of it can only be done after the RMD for the annuity has been completed. Therefore, the RMD for the annuity should be completed before converting any additional amounts. If client has other non annuity TIRA accounts, the RMD for those can be taken from any of the accounts per the aggregation rules.  
  • If the current annuity is converted, the insuror must determine the reportable amount recognizing certain additional benefits in the annuity beyond the cash value. This is a complex calculation that only the insurance company can do, so in order to avoid a high tax bill (RMD plus conversion) the client should get a quote from the company on the taxable value of a conversion. If too high an amount is converted in a single year, the benefit is questionable since conversions should not be done if the marginal tax bill is higher than the marginal rate paid through retirement had no conversion been done.
  • In summary, this is a complex transaction will tricky timing issues, and limited to the transactions offered by the current insuror. Obviously, RMDs would cease on the value converted effective with the year following the converted amount.
  • To add to the complexity here, the options for his beneficiary after his death should be clarified. RMDs would begin for an inherited Roth by a non spouse beneficiary. Client should NOT name his estate as beneficiary or neglect to specify a beneficiary, or the 5 year rule will be triggered upon his death for an inherited Roth.


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