A Roth conversion moves money from a pre-tax retirement account into a Roth IRA. You pay the tax now, and qualified withdrawals later can be tax-free. Here is how it works, in plain English.
Most retirement savings sit in pre-tax accounts, like a traditional IRA or an old 401(k). Every dollar you take out is taxed as ordinary income. A Roth conversion changes that: you move money from the pre-tax account into a Roth IRA and pay the income tax on it once, in the year you convert.
After that, the money grows inside the Roth, and qualified withdrawals are generally tax-free. In other words, you trade a tax bill now for tax-free income later. Whether that trade makes sense depends on your tax bracket today versus the bracket you expect in retirement.
A Roth conversion is a tax move. The annuity is what the money is invested in. For many people who want guarantees, a fixed annuity is a natural place to do a conversion, for a few practical reasons:
A MYGA guarantees your interest rate for a set term. That makes it easier to know what the balance will be worth, and therefore how much you may want to convert in a given year.
If your IRA already holds an annuity, many carriers allow it to be converted to a Roth IRA annuity in place, without cashing it out first. Carrier rules vary, so confirm the process and any surrender-charge treatment before you start.
Once the contract is a Roth IRA annuity, the guaranteed interest it earns is generally not taxed as it grows, and qualified withdrawals are generally tax-free.
Converting a little each year can keep you from jumping into a higher bracket. A ladder of annuities with staggered maturities lines up the money each year, so you know what is available to convert and when.
This page is general education, not tax advice. Roth conversion rules are individual and they change. Always confirm your specific situation with a qualified tax professional before acting. Devin is a licensed insurance producer and fixed annuity specialist, not a tax advisor.
Common sources are a traditional IRA, a rollover IRA, or an old employer plan such as a 401(k) that you have rolled into an IRA. If you are still working, your plan may or may not allow conversions.
The amount you convert is added to your taxable income for that year. Many people convert only enough to fill up their current tax bracket, and repeat it over several years, instead of converting everything at once.
The conversion is normally done by a direct transfer to a Roth IRA at the same or a different company, or in place if the carrier allows it. Direct transfers avoid mistakes that can cause unintended taxes.
The tax is due for the year of the conversion. If you pay it out of the converted amount, that portion never reaches the Roth, and if you are under 59½ it may also be treated as an early distribution subject to a 10% additional tax. Paying from savings outside the IRA usually keeps more working for you.
Two separate five-year rules apply. One governs when earnings in a Roth IRA are qualified (along with age 59½ or another qualifying event). The other governs penalty-free access to each converted amount before 59½. Each conversion starts its own clock.
Suppose you convert $50,000 and the extra income is taxed at a 22% federal rate. The federal tax would be about $11,000 (state tax may add to that). If you pay it from savings outside the IRA, the full $50,000 lands in the Roth. This is a hypothetical example, not a projection or a recommendation.
You can't undo it. Since 2018, a Roth conversion generally cannot be reversed (recharacterized) after the fact. Choose the amount carefully.
Required minimum distributions come first. If you are old enough to owe an RMD for the year, that amount must be taken before the rest can be converted, and the RMD itself cannot be converted.
Other IRAs can matter. If you also hold after-tax (non-deductible) money in any traditional IRA, a pro-rata rule decides how much of a conversion is taxable. Your tax professional will track this on the IRS forms.
The conversion adds to your income for that year. That can affect things like Medicare premium surcharges, the taxation of Social Security benefits and some credits, so it is worth modeling before you convert.
Pay at today's known rates. If you expect your tax rate to be the same or higher later, converting now locks in today's rate on that money. No one can know future tax law, but many people value the certainty.
Lower taxable income later. Qualified Roth withdrawals are not counted as taxable income, which can help keep other retirement costs, such as Medicare premiums and taxes on Social Security benefits, from rising.
A tax-friendlier legacy. Roth IRA money generally passes to beneficiaries free of income tax, though most non-spouse beneficiaries must empty the account within 10 years.
Pairs well with guarantees. Inside a Roth IRA annuity, a guaranteed rate means the interest you earn can compound tax-free, with predictable results during the contract term.
Our blog post, Roth Conversion with an Annuity, walks through how a conversion can work with a fixed annuity. Pair it with a conversation with your tax professional before you act.
No pressure, no obligation. Explore the rate tool, see which annuity may fit, or ask Devin anything about how an annuity could fit a Roth conversion plan. Availability and rates vary by product, state and carrier.