Let's talk about Roth IRAs and my take on Roth IRAs. Are the payments taxed? In a perfect world, where unicorns do chase the butterflies, Roth IRAs, in my opinion, should be used for non-annuity assets.
You've already paid the taxes on the Roth. That should be where the growth part of your portfolio is. Growth, meaning non-annuities, stocks, mutual funds and ETFs and crypto, and all that stuff that can grow because you've already paid taxes on it. That's my personal opinion on Roth. But if you want to buy an annuity inside of a Roth, and let's just say you buy a lifetime income stream product from within your Roth IRA using Roth IRA assets; that income stream is going to be tax-free, period. End of story. That's a good thing. And you can do that. But once again, in a perfect world that I live in and you should live in, Roth IRA should be for the growth portion of your portfolio.
Now, suppose you're using IRA money to purchase an annuity of any type, and let me stop right there because there are a lot of advisors and stupid journalists out there. In that case, that'll say, "Never put an annuity instead of an IRA ever." These people need to stop talking. Why am I saying that? This is because the IRS and the treasury department developed an annuity, the Qualified Longevity Annuity Contract for use in an IRA, period. You can use annuities inside of an IRA, period. And why would you do that? Good question. You'd do that for the contractual guarantees of that policy. If you're buying an immediate annuity with IRA assets, you're buying it for the pension guarantee of that Single Premium Immediate Annuity.
If you're buying a Multi-Year Guarantee Annuity of fixed-rate annuity inside of that IRA, you're buying it for the contractually guaranteed interest rate CD type interest rate. If you're buying an index annuity inside an IRA, you're buying it for the principal protection and the CD type returns. So you can use IRA assets to buy an annuity. Now, once you take money out of that annuity, whether it's a withdrawal with a Multi-Year Guarantee Annuity or a Fixed Index Annuity, or if you buy a Deferred Income Annuity or QLAC or an immediate annuity inside of an IRA, that income stream that comes out of your IRA is taxed at ordinary income levels. Just like if you pulled out money from any other non-annuity type of investment inside your IRA.
So I got a call the other day, and the guy said, "Well, I'm looking to buy an immediate annuity. Should I buy it in the traditional IRA, or should I buy it in the Roth IRA?" We went through his total picture of what he has, investible assets, net worth, and all that stuff. And at the end of the process, I said, "Use your Roth IRA for growth assets non-annuity assets, unless buying the immediate annuity with the IRA assets, you can attach your spouse for a joint lifetime income. It's a no-brainer for a lifetime income." Because what he was trying to do was put together that income floor, what's the income floor? That's your pension if you're so fortunate. Social security, which is an annuity, welcome to the party. Everyone owns an annuity that has a social security number. And then now this immediate annuity that he purchased inside of his IRA for lifetime income is the income floor that money's hitting every month, as long as they are breathing.
So IRA, Roth IRA, it comes down to your customized situation. But if you have additional assets, whether it's non-IRA money, IRA money, in addition to your Roth IRA, I'm going to tell you not to put the annuity in the Roth unless you just have to, want to, or put a gun to my head, Roth IRA should be for market growth, non-annuity investments. Okay, the only exception to that Roth rule, because there always is an exception, right? Nod your head. If you put the annuity inside the traditional IRA and it would create a tax consequence that maybe bump you into another tax bracket or whatever, then maybe we look at the Roth IRA as a place for you to put the immediate annuity for lifetime income or whatever. Once again, remember it's customizable.
The rule is that there are contractual guarantees that you can put in place, but it's customizable to your specific situation. So in that example, if you say, "Well, I'd love to put it in the traditional IRA, but that's just another source of income that's going to be taxable. I need a non-taxable income stream." Then it might make sense for us to look at that Roth IRA asset for a lifetime income.
Let's look at traditional IRAs and Roth IRAs. In Traditional IRAs, any money that's coming out of the traditional IRA, will be taxed at ordinary income levels. Any money coming out of the Roth IRA will be tax-free. It's that simple, but that's where the conversation starts, and that's when we look at your overall portfolio and the goals that you have for yourself, your spouse, and your family, from the standpoint of lifetime income and legacy, as you start planning for chapter two of your life, which in my world, annuities are that chapter two type product.
You either want to protect the principle, you either want lifetime income, you might want legacy, or you might want confinement care, long-term care, whatever that is. And that acronym I have is PILL, P-I-L-L. Principle protection, Income for life, Legacy, Long term care, confinement care. Those are the things, in my opinion, that annuity is sold for. They’re not market growth products. But just remember traditional IRA money, coming out, tax ordinary income levels, Roth IRA tax-free.
One last piece of information on your traditional IRA, if you don't know this, you will. At the time of this blog, when you turn age 72, the IRS will tap you on the shoulder and say, "You have to take required minimum distributions from your IRA." Now to me, RMDs, Required Minimum Distributions, are another form of lifetime income. It's another part of your lifetime income floor. So if you have social security, an annuity, of course, you do. If you have a pension from your company, which you're so fortunate to have, that's an annuity. That's lifetime income.
Your Require Minimum Distribution is the money you have to take from your IRA, it is also a lifetime income stream. And we can help you with that planning with that traditional IRA for your Require Minimum Distributions, either using specific types of annuities for lifetime income, et cetera and remember Qualified Longevity Annuity Contracts were designed for use for future lifetime income pension needs inside of an IRA.
If it sounds too good to be true, it is every single time.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.