Can I Convert an Annuity to a Roth IRA?
By Jeffrey Levine and Beverly DeVeny
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A holiday weekend version of The Slott Report Mailbag features questions concerning a 1099-R filing error, the possibility of converting an annuity to a Roth IRA and the viability of the often discussed (at least in this space) back-door Roth IRA. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
I have a 1099-R that requires a correction, and the trustee/custodian and I are in disagreement as whose “fault" caused the error. Can the trustee/custodian withhold giving me the corrected form until I pay them the IRS penalty fee for late corrections? Again, we are in disagreement as to who is to blame for the error.
I tried finding help on IRS.gov, but could find nothing related to this type of question. Thank you for any advice/guidance you can give me.
The general rule is that if a Form 1099-R is filed with incorrect information, the IRA custodian or trustee must file a corrected form as soon as possible. Any penalties for filing forms with incorrect information would be the responsibility of the IRA custodian or trustee, not the IRA owner. That being said, your question raises many more questions, such as exactly what the “error” was. Some errors, whether made by the financial institution or the IRA owner, cannot be fixed by simply filing a corrected Form 1099-R. This might be a good time to consult with a knowledgeable financial or tax advisor and discuss whether correcting the Form 1099-R is really the appropriate fix in your case.
Can I convert an annuity to a Roth IRA?
Maybe. It depends on how the annuity is owned. If you own your annuity with non-qualified (non-retirement account) funds, then the answer is no. However, today many people own annuities inside their IRAs or other tax-deferred accounts. Although there is no added tax benefit of the annuity in such cases, the investments are typically made for the guarantees offered by the contract(s). In such cases, where your annuity is owned by your IRA or other qualified account, it can be converted to a Roth IRA annuity. Keep in mind, however, that while the tax code allows you to convert (and recharacterize) portions of an account, many insurance carriers will not let you split your contract, in which case you will have to decide whether to convert the full contract to a Roth IRA or none of it at all. In addition, if there are any riders or guarantees in your annuity, there is a value to those and that value will be included in the taxable amount of your conversion.
I found this strategy in Ed’s 2015 Retirement Decisions Guide book. Can you still open a traditional IRA, fund it with post-tax dollars and then convert to a Roth IRA?
Yes, this is still a viable strategy. In fact, we have just released a newly designed guide to cover this topic extensively. Keep in mind that if you have pre-tax IRA funds in any other IRA accounts, your conversion will be partly taxable and partly tax free. You cannot convert only the after-tax contributions.
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