The taxpayer invests a traditional IRA in an annuity. Almost immediately, the taxpayer then converts the contract to a Roth IRA, and claims only the cash surrender value was includable in income for conversion purposes, excluding the value of the contract to surrender penalties.
The taxpayer invests a traditional IRA in an annuity and takes withdrawals from the contract that reduce the value of the death benefit on a dollar-for-dollar basis until the contract value is at the minimum required to keep the contract in force. This results in the death benefit being greater than the contract value. Then, the taxpayer converts the contract to a Roth IRA and claims only the minimum contract value is includable as income for conversion purposes and excludes the value of the death benefit.
An owner has an IRA (invested in a variable annuity) with a dollar-for-dollar withdrawal provision that has a guaranteed minimum death benefit of $200,000 and an account value of $100,000. If the taxpayer transfers $99,000 to another IRA and then converts the $1,000 of remaining contract value to a Roth IRA, under the final regulations, the fair market value for tax purposes would be adjusted for the $101,000 remaining death benefit, not the $1,000 of remaining contract value.
Taxable income from the conversion is included in gross income and reported on Form 1099-R for the year in which the conversion occurs. The additional 10% federal tax does not apply to the conversion amount.
It’s important to know that there may be differences in interpretation of the regulations and the actual calculation of values among financial institutions. If your client is considering converting a traditional IRA to a Roth IRA, help him or her contact the financial institution to learn about the tax consequences of the transaction.
The Retirement Strategies Group, subject-matter specialists with advanced degrees and designations such as CFA®, CFP®, ChFC®, CLU®, and JD, are ready to help.
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