In 2018, I did my first Roth conversion. Completing IRS Form 8606 on the 2018 tax forms was relatively easy. Line 6 was the total of all my non-Roth annuity contract accumulation values, less the annuity I was converting. I only received Fair Market Value (FMV) letters on 4 of my 7 annuities, but virtually every one was identical to my latest contract anniversary accumulation value, which also matched my end-of-year annuity value. Thus, no controversy. The annuity being converted to a Roth was 101.6% of my contract accumulation value on the 1099-R form, which the company explained as accounting for the additional value of the lifetime income rider (which I have on all 7 annuities).

In 2019, I did my second Roth conversion. In this case, the (same) life insurance company sent the 1099-R and the annuity was 103.0% of my contract accumulation value. No problem, not worth arguing the slight inconsistency. However, as I received the same 4 of 7 annuity year end FMV letters, three of these were again identical to the contract accumulation value, but one (Great American) suddenly had my FMV at 123.6% above contract accumulation value. This was in the same year that my contract lost 0.5% value (due to zero index gain and 0.5% cost of the lifetime rider deducted). I did send the paperwork in for starting the annuity late in 2020, but fail to see how this suddenly makes the annuity worth 24% more than 2018. I contacted Great American and they said that the numbers were correct, but refused to provide any detail on how this was calculated or why the sudden change between 2018 and 2019. I said I used to be an engineer and wanted to see their formula, tables, or whatever, that the math did not scare me. No luck.

Note that I have yet to take my first annuity payment from any contracts, and have not had any Roth or non-Roth IRA contributions for several years since retiring, so do not receive the IRS Form 5498’s from any of the companies. Neither the IRS publication 590 or Form 8606 instructions help in determining the definition of “value”. There is no mention of FMV, and to me it is only worth its value today, which is contract accumulation value (ignoring the fact that the contracts all still have large surrender charges).

Q1: Is the “value” referenced in IRS form 8606 contract accumulation value or FMV? FMV is so arbitrary between companies. Since no Form 5498’s are generated and sent to the IRS, does the FMV letter actually get put into a database anywhere that the IRS will challenge my Line 6 totals, which are accurate from my annual annuity documentation?

Q2: My second question is how a lifetime rider payment is calculated for IRS FMV purposes. Does the IRS give life insurance companies specific guidance? Because it is certainly not applied similarly in generating the FMV letters (for those that even bother to send them out in January).

In the end, the IRS will get their money anyway in paying for the Roth conversions or by paying taxes on non-Roth income. Using FMV instead of cumulative contract accumulation values front-end loads the payment of taxes slightly earlier, as the percentage of the basis is slightly smaller (if indeed I should use FMV instead of contract accumulation value).

It makes sence to me that the Roth conversion value uses FMV, as the IRS only gets one shot at tax money on this account, but FMV on line 6 just makes calculations ugly with vastly different calculations by different annuity companies and some never reporting FMV at all.

I can find nothing on the internet (or Ed Slott blogs) specifically addressing this. The FMV letter from Jan 31, from the companies that do send it out, just seems so unofficial that I question if the IRS uses it for anything, although it states that the IRS receives the same letter.

Thanks…sorry for the long rant, but I am so confused and this is probably the best website to clear this up..