A monthly annuity offers a regular income in retirement, but once you hear about the tax-free withdrawals from Roth individual retirement accounts, it's natural to wonder whether you can get in on the savings. Unfortunately, most annuities aren't qualified retirement accounts, so you can't roll the proceeds or the principal into a Roth IRA. However, if you have a tax-sheltered annuity, like a 403(b) plan, you may be able to move the money.
If you have a tax-sheltered annuity, or 403(b) plan, you're eligible to roll it into a Roth IRA if you're either over 59 1/2 or you've left your job. Otherwise, you're not able to roll it over. Sure, you might be able to get some of the money out through a hardship distribution or loan, but those distributions are not eligible to be rolled over. If you inherited the 403(b) plan, you're not eligible to convert it to a Roth IRA unless it was your spouse who left it to you.
403(b) Conversion Taxes
If you can roll money from your 403(b) to a Roth IRA, you must pay taxes on the portion of the conversion that would be taxable if you took a distribution. This is because you're moving money from a tax-deferred account to an after-tax account. Unless you've made nondeductible contributions to your 403(b), that means the entire conversion is taxable. However, the good news is that once you're able to take qualified distributions from a Roth IRA -- you've had a Roth IRA for five years and you're either 59 1/2, permanently disabled, or taking out up to $10,000 for a first home purchase -- all the money comes out tax-free.
If you have a non-qualified annuity, you can't roll over the money to a Roth IRA because it's not a qualified retirement plan. If you could, the contribution limits for IRAs would be meaningless. Instead of contributing to a Roth IRA, anyone could simply put as much money as they wanted in a non-qualified annuity and then roll it over to a Roth IRA. Any money you attempt to contribute to a Roth IRA from a non-qualified annuity counts as part of your annual contribution. So, if you put in more than the annual limit, you'll be on the hook for a 6 percent per year excess contributions penalty.
Making Roth Contributions
If you're eligible to contribute to a Roth IRA, which means your modified adjusted gross income falls under the annual contribution limits and you have compensation, the IRS doesn't care where the money you put in the Roth comes from. Compensation only includes earnings from working and taxable alimony, so your annuity payouts don't count. For example, say you earn $50,000 from your job and another $6,000 from your annuity payouts. You can use either the annuity money or your compensation to fund your Roth IRA for the year.
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- The Eight Mistakes When Converting to a Roth IRA
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