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 Roth
Conversions and Individual Retirement Annuities
by John Carl, President,
Retirement Learning Center
With the upcoming 2010 law changes that
will liberalize conversions to Roth IRAs going forward, our
ERISA consultants on the Columbia Management Resource Desk
have been answering an increasing number of calls from
financial advisors who have specific questions about Roth
IRA conversions and the tax implications for their clients.
Through our
relationship with the Columbia
Management
Learning
Center,
we regularly guide Columbia Management’s financial advisor
partners through the rules and regulations that apply to
Roth IRA conversions.
A recent call with Morgan
Stanley advisor in Arizona
is representative of a typical question on this subject.
The advisor queried:
When an individual converts a Roth IR annuity, how is the
annuity contract valued for conversion taxation purposes?
Highlights of Recommendations
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If an individual converts an IRA
or qualified plan to a Roth IRA, he/she must pay taxes
on any pre-tax
assets that are converted.
This rule applies to conversions of individual
retirement (IR) annuities and annuity contracts held in
IR accounts as investments as well.
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Generally
speaking, when an individual converts an annuity
contract, the amount includible in gross income is the
fair market value (FMV) of the contract on the date the
annuity contract is converted to the Roth IRA.
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The good news
is—the insurance carriers offering the annuity contracts
are responsible for properly determining the FMV of
converted annuity contracts, and reporting the amount on
IRS Form 1099-R to the taxpayer and IRS.
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The rules for
determining FMV for conversion purposes for IR annuity
contracts, or annuity contracts within IR accounts, are
found in Treasury Decision 9418, and Treas. Regs.
1.408A-4, Q&A 14.
http://edocket.access.gpo.gov/cfr_2009/aprqtr/pdf/26cfr1.408A-4.pdf
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These rules
are complex; and different methods are used for various
types of annuity products. Often, the rules leave room
for interpretation as the rules pre-date many modern
annuity features.
It is wise to seek competent tax advice.
Conclusion
Determining the taxable portion of a Roth IRA conversion
that involves an annuity contract is a complicated matter,
and clients should consult their tax professionals for
precise information. Ultimately, the insurance carrier
offering the annuity contract is responsible for accurately
determining the FMV of the contract for conversion purposes.
Nevertheless, it is important for financial advisors to have
a general understanding of the rules.
That’s why having a reliable source available, such
as the Columbia Management Resource Desk, to guide advisors
through the Roth conversion rules can turn a difficult
client question into an opportunity to differentiate the
advisor and build relationships.
©2009 Retirement Learning Center
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