Have you heard of a Roth conversion annuity but aren’t sure how it works? A Roth conversion lets you move money from tax-deferred accounts, like a traditional IRA or 401(k), into a Roth account, where it can grow tax-free.

A Roth conversion annuity works the same way but offers additional benefits, like guaranteed growth or income, depending on the type of annuity. This strategy could be a smart move if you’re looking to reduce your future tax burden or pass tax-free money to your beneficiaries.

Understanding Qualified Money, RMD Rules, and Roth Conversion Annuities

When you contribute to accounts like an IRA, 401(k), or TSP, you’re saving pre-tax dollars. That’s what we call “qualified money.” While this helps you save on taxes now, you’ll owe full income tax on those withdrawals later.

Here’s an important rule: Once you turn 73, you must start taking Required Minimum Distributions (RMDs). These withdrawals are taxable and can even push you into a higher tax bracket. A Roth conversion annuity can help reduce these RMDs and future taxes.

Quick Comparison of Account Types:

Account Type	Tax When Contributing	Tax When Withdrawing
Traditional IRA	Tax-deferred	Taxable
Roth IRA	Taxed upfront	Tax-free
Roth Conversion	Taxable (on the conversion)	Tax-free on growth and withdrawals

The Evolution of Roth Conversion Annuities in 2025

In 2024, a few annuity companies began offering a unique feature: internal Roth conversions. This allowed people to convert money inside an annuity, keeping the same policy, benefits, and terms.

Now, in 2025, there are still only a handful of companies that are offering this option, but expanding it to cover a wider range of annuities, including income annuities. This gives you more flexibility to choose the right annuity for your retirement goals.

How Roth Conversion Annuities Work: A Step-by-Step Guide

Here’s how a Roth conversion annuity works:

-Set up an annuity using a tax-deferred account, like a Traditional IRA.
-Request a Roth conversion. The annuity company creates a mirrored policy under Roth IRA rules.
-Move money on your schedule or a systematic set period of time (e.g., 5 years).
-Pay taxes on the conversion amount out of pocket or from the annuity. Once converted, all future growth and withdrawals are tax-free.

Example of a Roth Conversion Schedule (if taxes paid out of pocket):

Year	Amount Converted	Taxes Paid	Balance in Roth Annuity
1	$20,000	$5,000	$20,000
2	$20,000	$5,000	$40,000
3	$20,000	$5,000	$60,000
4	$20,000	$5,000	$80,000
5	$20,000	$5,000	$100,000

Steps and Considerations for a Successful Roth Conversion Annuity

When converting, it’s essential to understand the logistics and tax implications. Here are the steps:

- Establish the annuity with a tax-deferred account.

- Request the Roth conversion. The company will set up a mirrored policy with identical benefits.

- Decide how to pay the taxes:
  - - Out of pocket (recommended to maximize Roth contributions).
  - - Directly from the annuity funds (reduces the amount going into the Roth).

Keep in mind that if the taxes owed exceed the penalty-free withdrawal provision (typically 10%), you may incur surrender charges.

Important Rules and Penalties for Roth Conversion Annuities

The rules for Roth conversion annuities follow standard Roth IRA guidelines, but there are a few additional details to consider:

- Age Restrictions: You won’t face a 10% IRS penalty for conversions, even if you’re under 59 ½.

- Five-Year Rule: Each conversion starts a new five-year clock if you are under 59 1/2. Withdrawals made before this period may incur penalties on interest gains.

Key Rules Summary:

Situation	Penalty Applies?
Under 59 ½, converting funds	No
Withdrawing interest gains before 5 years (except for specific provisions)	Yes
Over 59 ½	No

Why a Roth Conversion Annuity Might Be Right for You

A Roth conversion annuity offers several advantages, including:

- Lower Future Taxes: By converting now, you could avoid higher taxes later.

- Reduced RMDs: Since Roth IRAs don’t have RMDs, this strategy could help keep your taxable income lower in retirement.

- Tax-Free Inheritance: Money in a Roth annuity could pass tax-free to your beneficiaries.

These benefits make Roth conversion annuities a powerful tool for long-term retirement planning.

Get Started with a Roth Conversion Annuity Today

If you think a Roth conversion annuity might be right for you, take the first step by learning more about the companies and products that offer this option. Always consult your tax professional before making any decisions to ensure it fits your financial situation.

For more personalized guidance, schedule a call on my calendar and we’ll explore whether this strategy aligns with your goals.

Episode 67: Roth Conversion Annuity Update for 2025