What If You Have An Annuity In IRA?
Your tax obligation isn't limited to the cash value of the contract. Instead it's determined by the fair market value of the annuity, which is the cash value of the contract on the day you convert plus the actuarial net present value of any living or death benefits. (Your insurance company can calculate your present net value for you.)
For example, if your annuity has a cash value of $50,000 and the death benefit is worth $200,000, you'll owe taxes on $250,000.
Take extra care if you are only partially converting your variable annuity. When you convert an entire annuity, the annuity itself remains intact. But when you convert only part of an annuity, you are essentially splitting off part of your annuity to create a new IRA. This sounds simple enough, but breaking off a piece of the annuity could be the same as making a withdrawal. Depending on your annuity, a premature withdrawal could trigger the annuity to lock in a living benefit payout percentage earlier — and therefore much lower — than you had expected or planned. It could also cause the annuity to stop providing guaranteed growth or income.
In our next blog post, we will discuss another could be severe complication of Roth IRA conversion.