Fifo vs. Lifo
My question is if a client has an IRA (in an annuity) and decides to convert to a Roth. I understand the taxable implications of conversions. My question is which rule supercedes which, on withdrawals? Roths are withdrawn as FIFO but annuities are withdrawn as LIFO.
I think if I understand correctly the way it currently works is that the ROTH takes trump and withdrawals are FIFO in the contracts. Can someone confirm that to me and is there a ruling on that anyway that can be cited?
Permalink Submitted by Alan Spross on Tue, 2009-01-27 21:13
You are correct. The IRA rules trump the annuity rules for both traditional and Roth IRA annuities. Copies of Code sections below:
For Roth IRAs:
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408A(d)(4) Aggregation and ordering rules
(A) Aggregation rules
Section 408(d)(2) (see below) shall be applied separately with respect to Roth IRAs and other individual retirement plans.
(B) Ordering rules
For purposes of applying this section and section 72 to any distribution from a Roth IRA, such distribution shall be treated as made –
(i) from contributions to the extent that the amount of such distribution, when added to all previous distributions from the Roth IRA, does not exceed the aggregate contributions to the Roth IRA; and
(ii) from such contributions in the following order:
(I) Contributions other than qualified rollover contributions to which paragraph (3) applies.
(II) Qualified rollover contributions to which paragraph
(3) applies on a first-in, first-out basis. Any distribution allocated to a qualified rollover contribution under clause (ii)(II) shall be allocated first to the portion of such contribution required to be included in gross income.
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For TIRAs:
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408(d) Tax treatment of distributions
(1) In general
Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72.
(2) Special rules for applying section 72
For purposes of applying section 72 to any amount described in paragraph (1) –
(A) all individual retirement plans shall be treated as 1 contract,
(B) all distributions during any taxable year shall be treated as 1 distribution, and
(C) the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins. For purposes of subparagraph (C), the value of the contract shall be increased by the amount of any distributions during the calendar year.
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Permalink Submitted by charles lore on Thu, 2009-01-29 01:05
Keep in mind that if it is a variable annuity you must calculate it’s value as csv plus actuarial value of other benefits. You’ll have to try and get this value from annuity company. You wll need this to figure out the character of the distribution.
Permalink Submitted by Al Fry on Thu, 2009-01-29 19:12
Most carriers do those calcs in early January. Even with account values being down, my additional value was only about 1% of AV.
Permalink Submitted by Anna Dashkevich on Mon, 2022-06-13 17:29
Are there any changes to taxation of distributions from Roth IRA Annutieis withing the first 5 year period after conversion? The question was posted over 13 years ago. Thank you!
Permalink Submitted by Alan - IRA critic on Mon, 2022-06-13 17:46
There have been no changes. If a taxpayer converts a TIRA annuity to a Roth IRA annuity or converts cash and then purchases an annuity in the Roth IRA, assuming this is the only owned Roth IRA and the conversion was 100% taxable, any distribution from the Roth annuity in the first 5 years will incur a 10% recapture tax. These taxes end upon reaching 59.5.