annuities and roth conversions

Submitted by Robert Beane on Fri, 2020-08-28 16:02

Client has 3 traditional IRA annuities that are converted to Roth IRAs in 3 successive years to minimize the tax impact (progressive tax rate system). These contracts have lifetime income riders. The client decides to begin lifetime income withdrawals immediately after the conversion.

Question 1. Assuming the client is over age 59 ½ when the withdrawals begin, will the client avoid the early withdrawal penalty as long as the total amount of the distributions in the first 5 years is less than the conversion amount?

Question 2. In determining the 5-year period to avoid the early distribution penalty, are all of the conversions considered as one Roth IRA beginning with the first conversion?



Submitted by Alan - IRA critic on Fri, 2020-08-28 16:49

  • Yes, the 5 year conversion holding periods all end at 59.5, and there is never a penalty for Roth distributions after 59.5. Prior to 59.5 each conversion has it’s own 5 year holding period.
  • With respect to income tax on earnings, earnings come out last prior to the Roth becoming qualified. To reach qualification for all accounts, just one Roth account must have been funded for 5 years and 59.5 must be attained.  If client’s first Roth IRA contribution (regular or conversion) occurred prior to 2016, all Roth accounts will be qualified when client reaches 59.5. 
  • Before client’s Roth is qualified, all distributions must be reported on Form 8606 under the Roth IRA ordering rules for distribution, so client will need to know the regular contribution basis and the conversion basis. Amount in excess of this basis are earnings and will be taxable and subject to penalty if under 59.5.


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