Annuitizing IRA to allow for back-door Roth

Submitted by Joseph Schwarz on Fri, 2023-04-21 16:49

Hi, I have a client with a legacy $15k qualified annuity that has a large surrender charge. Interestingly, the surrender charge will always be there, but we can avoid that with this contract by annuitizing it. While the annuitized policy will create some income prior to the client being 59.5, it would only be for a few years and seems like a better financial option. If this is the client’s only IRA, would this strategy effectively get rid of the IRA also and then allow for the back-door Roth strategy? Thanks much.



Submitted by Alan - IRA critic on Fri, 2023-04-21 17:47

  • Yes, because there is no year end value for the annuitized IRA account, Form 8606 used to report the back door conversion would result in the taxable amount being limited to the annuity payout, whatever that is. The IRS never issued guidance regarding the Form 8606 year end value of an annuitized IRA, so presumably it would be 0. But the annuity payment would also have to be reported on the 8606 along with the ND contribution, but prorating the basis would result in the taxable portion of the annuity distribution and the conversion being the same. Since part of the conversion would be taxable, there would be a 5 year holding period for that portion of each conversion to avoid the 10% penalty if that conversion was distributed from the Roth IRA before 5 years or age 59.5.
  • Also, keep in mind that annuitizing an IRA for life or joint life will result in the annuity payout being treated as RMDs from the start, well before RMDs would otherwise start. Therefore, the annuity payout would not be eligible for rollover, being an RMD. The client could avoid that by having the annuity period terminate prior to reaching 73. 


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