IRA Update From Ed Slott

August 22, 2005

IRS Shuts Down Roth IRA Annuity Conversion Scheme

IRS just released temporary regulations shutting down several dubious schemes set up to lower the tax on a Roth conversion by using an annuity. This will not work anymore and those who have already done this may also find themselves in trouble.

If it sounds too good to be true, it probably is….

That’s good advice for most things, but it is especially true when it comes to ways to beat the taxman.

Some promoters had claimed that you could convert an annuity in a traditional IRA at a low tax cost by using an artificially depressed value. That would give you a low conversion value and in turn lower the tax on the Roth conversion. Then, once the annuity was in the Roth IRA, its value would magically spring to what it was really worth in the first place, i.e., it’s true fair market value. When the smoke cleared, Uncle Sam did not get his share of the tax.

IRS has outright rejected promoter’s claims that this would work. It will not work for depressed account values at conversion and, it will not work for death benefits that are not proportional to premiums paid. The temporary regulations are effective as of August 19, 2005 and IRS has left the door open to applying these rules for prior tax years.

Look for more details in the October, 2005 issue of “Ed Slott’s IRA Advisor”.

By Ed Slott © 2005

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