What the IRS chart allows
| Roll from | To a Roth IRA | To a traditional IRA or plan |
|---|---|---|
| Roth IRA | Yes (one rollover per 12 months) | No |
| Designated Roth 401(k), 403(b) or 457(b) | Yes | No |
| Traditional IRA, SEP IRA | Yes, the untaxed amount is included in income | Not applicable |
| Pre-tax 401(k), 403(b) or governmental 457(b) | Yes, the untaxed amount is included in income | Yes |
| SIMPLE IRA | Only after two years, and the untaxed amount is included in income | Only after two years |
Source: the IRS rollover chart and IRS SIMPLE IRA rules.
The conversion trap
Moving pre-tax money to a Roth IRA is taxable as income in the year of the transaction, other than qualified Roth distributions and amounts already taxed (IRS: Rollovers of retirement plan and IRA distributions). If you pay the tax out of the converted money, less lands in the Roth. A conversion also adds to your income for that year, which can affect other income-based costs, so ask your tax professional to model it before you convert.
Required withdrawals
The IRS says you are not required to take withdrawals from a Roth IRA, or from a designated Roth account in a 401(k) or 403(b), while the account owner is alive. Beneficiaries of Roth accounts are subject to required distribution rules (IRS: required minimum distributions).
The traps
- Nontaxable amounts. The IRS chart notes that any nontaxable amounts distributed from a designated Roth account must be rolled over by a direct trustee-to-trustee transfer.
- A Roth IRA cannot go backward. It cannot roll into a traditional IRA or an employer plan.
- Timing rules. Roth accounts have a separate waiting period for tax-free earnings. Ask your tax professional how it applies to your accounts before you rely on a withdrawal being tax-free.
Where an annuity fits
An annuity inside a Roth IRA does not add tax benefits beyond the Roth treatment already there, and it can add surrender charges and fees. The reasons to consider one are the contract features, and its guarantees depend on the issuing company’s claims-paying ability. Because Roth money has no required lifetime withdrawals, a Roth IRA annuity should be evaluated for how long you can leave the money untouched. See every rollover account at a glance.
Weighing a Roth conversion and an annuity?
Request a no-obligation Retirement Income Review. We explain your options in plain English, with no pressure and no promises of returns.
Request my Retirement Income ReviewQuestions to ask
- Is this money Roth or pre-tax, and how do I know?
- If it is pre-tax, what would the conversion tax be, and where would I pay it from?
- Is the transfer direct, trustee to trustee?
- How long can I leave this money untouched, given surrender charges?
Related reading
See SEP and SIMPLE rollovers, inherited IRA rules and how annuities are taxed.
Where to check these rules
Every rule on this page comes from the IRS. Read the source for your situation:
- IRS rollover chart (PDF)
- IRS: Rollovers of retirement plan and IRA distributions
- IRS: Retirement topics, required minimum distributions
- IRS: SIMPLE IRA withdrawal and transfer rules
Availability and rules vary by state
Life insurance and annuity products, rates, riders and consumer protections differ by state, and a given product may not be available in every state. Honorbrook is licensed in the 11 states below; which products we can offer you depends on what carriers sell in your state. Each state’s insurance regulator can verify an agent’s license and answer consumer questions.
- Virginia: Virginia Bureau of Insurance
- Maryland: Maryland Insurance Administration
- North Carolina: North Carolina Department of Insurance
- South Carolina: South Carolina Department of Insurance
- Georgia: Georgia Office of Insurance and Safety Fire Commissioner
- Alabama: Alabama Department of Insurance
- Louisiana: Louisiana Department of Insurance
- Texas: Texas Department of Insurance
- Michigan: Michigan Department of Insurance and Financial Services
- Indiana: Indiana Department of Insurance
- West Virginia: West Virginia Offices of the Insurance Commissioner
This article is general information and is not tax, legal, investment or financial advice. Annuity guarantees depend on the issuing company’s claims-paying ability, and surrender charges and fees may apply. A licensed agent can help with your situation.