How do I include annuity Roth conversions in a plan?

1. Any tax-qualified annuity (IRA, 401(k), etc.) that you enter in the 'Assets' > 'Annuities' tab can include a custom Roth conversion strategy.

2. To include Roth conversions, click the gear icon on the right of the annuity in the stepper and click Annuity Settings.

3. Go to the Roth Conversions tab and check the box by 'Convert this Annuity to a Roth IRA'. Then, enter the year range for Roth conversions. This annuity will be converted to a Roth IRA evenly across the chosen years. (Exact amounts that are converted may not be exactly equivalent, depending on the annuity's other settings. In some cases, the final Roth conversion may be slightly larger or smaller than the other years' conversion amounts.)

4. Once set, you will now see the annuity undergo Roth conversions during the chosen year(s). In Life Hub, you will see the original annuity along with an otherwise identical Roth annuity. If the annuity has a Living Benefit, all living benefit parameters will be the same in these two annuities. Any living benefit withdrawals or custom distributions will be taken proportionally out of the original annuity and this new Roth annuity. If withdrawals begin after Roth conversions are complete, all withdrawals will come from the Roth annuity. Typically, you will want to begin withdrawals after Roth conversions are complete.

Annuity Roth Conversions and Tax Lab

Since annuities tend to have very special rules regarding withdrawals and Roth conversions (not all annuities allow Roth conversions, and annuities often limit withdrawals in some way), annuities that you enter in the Assets > Annuities section do not take part in the Roth conversion strategies in Tax Lab. So, the only way to include annuity Roth conversions is to include a custom Roth conversion plan for that annuity. When you include a custom annuity Roth conversion plan, the specified Roth conversions will be included in all strategies in Tax Lab, including those that do not normally include Roth conversions (e.g., Pro Rata or Taxable, Tax-Deferred, Tax-Free). Furthermore, the annuity's Roth conversions will not be modified in Tax Lab. They will be consistent in amount across all strategies.

Withholding Funds for Taxes

Annuities that have a 'Custom Plan' for their distributions will also have the option to 'Pay estimated taxes from annuity during Roth conversions'. This option allows some of the amount that would otherwise be converted to a Roth IRA to be withheld and distributed from the annuity in order to (help) pay the taxes related to the Roth conversion. Living benefit annuities do not include this option since annuity withdrawals affect the living benefit guarantees. For these annuities, all withdrawals are controlled in the 'Income' tab.

To control the size of these tax withholdings, specify the tax withholding rate (22% in the example above) and the annuity balance that should not be touched for these withholding distributions. The example above is for a $200,000 IRA annuity that received a 10% bonus, and so currently has a $220,000 balance. In this example, we want withdrawals to be taken only from annuity gains, with none of the original premium accessed for tax-related withdrawals. So, the 'Floor/basis not to be accessed for tax payments' is set to $200,000. This will allow tax withdrawals to come from the $20,000 in gains in the annuity that came from the 10% bonus, as well as any gains or interest credited to the annuity during the Roth conversion phase.

In this example, Roth conversions proceed over 4 years, as in the table below. As you can see, a $200,000 IRA annuity premium leads to a $207,000 Roth annuity balance by the end of the fourth year. (The table below shows beginning-of-year balances.)

During these 4 years, $53,400 was withdrawn from the annuity to fund Roth-conversion-related taxes.

One way to find the right tax withholding rate is to run the plan with no annuity Roth conversions and, in Tax Lab, go to the Explore > Income section. There, you'll see the marginal tax bracket for the plan without annuity Roth conversions.