Just say ‘no’ to an annuity in your Roth IRA
IRAs of all kinds offer great investment flexibility. While it is nice to be able to put most anything in an IRA, that flexibility doesn't mean most anything will make a good choice.
Q. Can I roll over money in a Roth into an annuity and if so, will the gains be tax free to a beneficiary when cashing out the annuity? Can the beneficiary inherit the Roth intact with the annuity and not have the funds taxed when taking the lump sum or the five-year withdrawal plan? Thanks — P.T.
A. The type of account, a Roth IRA in this case, dictates the tax rules that apply not the type of investment product in the account. In most cases, beneficiaries pay no taxes on Inherited Roth IRA distributions even if the money inside the Roth IRA is invested in something such as an annuity that can generate taxable income if owned in a different type of account.
So, yes you can put Roth IRA savings into an annuity. Whether you should is another matter. Annuities have a specific tax treatment that can be good for some taxpayers with the right situation. Because the account's status as a Roth supersedes other tax rules, that treatment is irrelevant if purchased within a Roth IRA.
Most annuity contracts provide some type of guarantee or an array of guarantees about the account value. These are often used as the heart of the
sales pitch. All guarantees have a cost. The cost, in and of itself, isn't the problem. What is usually the problem is that in many cases, the costs cover guarantees you don't need or the costs aren't a good value.
In addition, by buying an annuity, you are adding unnecessary complications. The insurance company, not you, offering the product decides what your investment options are going to be. If for any reason you want to move the money elsewhere, in many cases, you will have to contend with surrender charges. Many contracts also allow for fee increases at the discretion of the insurer up to specified limits.
Q. I have a question about an inherited ROTH for a non-spouse beneficiary. If they elect to withdraw the money over their lifespan using the required minimum distribution option, can they make withdrawals that exceed the calculated amount? — A.E.
A. Yes. The required minimum distributions from retirement accounts including Inherited Roth IRAs are just that, minimums. One can always elect to take more.
Dan Moisand's comments are for informational purposes only and aren't a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity .
- How to reduce retirement anxiety
- 8 reasons fixed-income annuities belong in your IRA
- 13 reasons why a QLAC belongs in your IRA