Open a 10 year FIA, only to tap it annually for incremental Roth conversions?
I’m repositioning a client, 70, from a nearly ended 10-year qualified FIA, into a Q FIA that far better serves client wishes. The existing FIA was an income play, but client didn’t know it or remember it, especially about its VERY low annual pt- to- pt cap, just over 2%. The income it would soon generate is not impressive or enticing to client, and not needed in next 10 years, as household income is quite strong- $200k+/yr.
Is there some rule, reason,IRS letter or logic that would make this ill-advised? I’m all about suitability, and not being a CPA or Tax attorney, I dread overlooking something.
I reminded that a 10-year FIA is considered a long term instrument, that tapping it for 10% per year somewhat defeats a few of its purposes- to safeguard funds while giving oneself an opportunity for decent compounding growth over time, setting him up for favorable options such as GLWB/income at its end, to which he countered- Yes, good, but the 9 or so small Roth IRAs I create along the way, using the allowed annual withdrawals taken from this new IRA Annuity (yes, after the first year), will also perform as designed- for growth, and as a series of laddered Roth IRA annuities (FIAs). And, mirroring my tips, he adds – “…as you coached: it’ll be good tax-bracket-mgmt..” since he’ll be kept well shy of the next higher bracket- 32%. So… he argues, he wont be defeating the 10-year annuity’s purpose, just gradually transitioning funds, as I have preached, away from tax-deferred accts and into tax-free (Roth) accounts.
(His side question: “Please help me be smart about how I take RMDs come age 73.” Many other account types to tap)
May I please invite your thoughts? Thanks so much!
Permalink Submitted by JAMES SCHWEIKERT on Thu, 2025-02-06 15:33
PS: To clarify, as the topic headline reads- He ponders annually tapping the new 10-yr FIA for the allowed 10% of account value, to convert into incremental Roth IRA Annuities, also FIAs. (Thank you)
Permalink Submitted by Alan - IRA critic on Thu, 2025-02-06 17:03
Converting distributions from an IRA annuity is basically the same as any other Roth conversion. But because these are conversions, the one rollover limitation per 12 months does not come into play, and neither will RMDs in 3 years since Roth IRAs are not subject to RMDs.
Of course, if each year’s conversion will require a new Roth IRA account, there will be many annuity purchases, and I don’t know how much that would increase the fees/commissions that are already substantial for these products. Obviously, it will add complexity.
As for pre tax (non Roth) IRA annuities that still exist at 73, once RMDs begin the insurance company will have to provide a year end value for each contract that reflects the fringe benefits of those contracts. The taxpayer can then add up the total RMDs for all such accounts, and satisfy the total RMD in any combination of those accounts.