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Retirement Weekly: What can I do with a Roth annuity?


Q.: I am holding a Roth annuity and considering starting an annual income stream. However, I don’t need this money now so I would like to deposit it back into the Roth account. Does the IRS allow this or do I have to use that money? I know it is NOT taxable because it’s coming from a Roth account.

— HS

A.: The word “considering” suggests to me that starting an income stream is something you are choosing to do rather than being required to do. If that is the case, why bother taking anything? You could just leave it be or if you do not like the annuity, get rid of the annuity. There are issues like surrender fees and giving up certain guarantees so you should talk with your adviser about what leaving the annuity entails but there won’t be a tax consequence if you make a change.

In your case, the two parties most likely to compel withdrawals from a Roth account are the tax code and the annuity contract.

A taxpayer’s personal Roth IRA is not subject to Required Minimum Distributions (RMD). You can leave every penny in your Roth IRA for the rest of your life if you wish. But, if the account is any other type of Roth account such as Roth 401(k), Roth 403(b), or an Inherited Roth IRA, those accounts are subject to RMD when you turn 72 unless it is a company retirement plan and you qualify for the “still working” exception.

You do not have to spend your RMD, but you cannot rollover a RMD into a Roth or other retirement account.  There is little you can do about the RMD on an Inherited Roth IRA but if this Roth account is in a company retirement plan, you may be able to roll that into an existing or new individual Roth IRA for yourself and thus avoid future RMDs.

The annuity contract may have a provision to start paying an income stream at a certain age. This requirement can trigger even if the annuity is in a Roth IRA not subject to RMD. You should review the contract to see if the date an income stream must start can be deferred. Many contracts have such a provision.

If deferring the triggering age is not possible and the account is not subject to RMD (it is in your Roth IRA or you have the “still working” exception), you should be able to have the payments directed to another Roth IRA account you own or open via a direct rollover. The insurance company that sold you the annuity would make the check payable to this other Roth account, not you as an individual. 

Annuities were created to provide a lifetime stream of cash flow, but most retirees are not receiving such payments. Instead, like you, they are sold annuities as accumulation vehicles. They are not all bad, of course, but I am generally not a fan of using annuities as an accumulation vehicle in IRAs, Roth IRAs and retirement accounts because they create another layer of rules that must be navigated in addition to those in the tax code and the fees charged to provide various guarantees can be high.

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.

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