Annuity Inside a Roth IRA
Hi, I'm Stan The Annuity Man, and I'm glad you're here. Me and you, we're going to talk. So, focus, it's just me and you talking about, can you have an annuity inside of a Roth IRA? The short answer is yes, but I want to dig deeper into that and give you some examples of how it would work and some of the types inside that would work, and how the whole should you, shouldn't you, et cetera, a lot of people are going to tell you no. I'm going to tell you maybe, depending on your situation.
What's a Roth IRA?
So, what's a Roth IRA? You obviously know that because you probably have one, which is the reason we're talking, but if you don't, a Roth IRA is a structure, similar to a traditional IRA, that the money inside of it, you've already paid taxes, you're a patriot, you've already paid all those taxes on the Roth IRA. My only fear is I hope our friends in DC don't change the rules, but I don't think they will. There'll be a backlash, and there'll be a bunch of people with Roth IRAs with those fiery things marching on the steps and yelling. We probably should do that anyway, but I digress. So, inside of a Roth IRA, let's look at the types inside of a Roth IRA and how they would work. We're not going to go into who Roth is because I really don't care. The great part about it is that he's probably a nice guy, a senator, congressman, whatever, but that's who it was named after. Roth means not taxable. So, the money's already been taxed, so everything coming out of it is not taxable.
If you need income now, then that's an Immediate Annuity. If you put an Immediate Annuity inside your IRA that pays you for the rest of your life, that income stream will be tax-free for the rest of your life. That's a good thing, right? Same thing for income later. If you want to do income later, which would be Deferred Income Annuities or Income Riders, those are income later things. You can get quotes from Stan The Annuity Man on all of this by going to our website, but you could put it inside of a Roth IRA, and when you decided to turn the income stream on, that income stream would be, all together now, tax-free, which is good.
Now, QLACs cannot go inside a Roth IRA, so that's not something you can put in there. Principal protection products, which are MYGAs, which are Fixed Rate Annuities or Index Annuities, Fixed Index Annuities, they also can be placed into Roth IRAs. So, your principal is fully protected because they are CD-type products, and whatever gains on the MYGAs, a percentage on the Index Annuities, whatever the gains are, are locked in, and when you pull the money out, those are tax-free.
The Two Questions
So, the question truly is, why do you want to put money in a Roth IRA? It comes down to two questions I always ask everyone. Number one, what do you want the money to contractually do? And number two, when do you want those contractual guarantees to start? From those two answers, they'll point you to whatever product fits what you're trying to achieve with the goals, but then the fact that you're putting into a Roth IRA is irrelevant other than the fact that the money coming out is tax-free. Don't get caught up on whether you should put it in a Roth or a regular IRA. I need you to focus on why you're buying the annuity, the contractual reason, and the guarantees. Obviously, you shop all carriers through us at to make your decision. The great part about a Roth is that you've already paid taxes on it. In my opinion, you should look at your income streams; that might not be a bad place to go.
In many cases, once we go through your full portfolio, true market growth products should be inside of a Roth, like stocks, ETFs, and stuff that you're pretty aggressive with. And when I say market growth products, then I've completely eliminated any annuity types, in my opinion, as Stan The Annuity Man, America's annuity agent, licensed in all 50 states, I've been doing this for decades.
What They Will Do, Not Might Do
Annuities should only be purchased for what they will do, not what they might do, and the might do is growth, market type growth. So, in a perfect world of unicorns chasing the butterflies, Roth IRAs should be where the growth part of your portfolio is, but with that being said, you might be sitting there going, "Stan, I don't want to do growth anymore. I don't want to take risks anymore. I don't want to see my money lose value ever. I need contractual guarantees." In that case, then it does fit inside of a Roth IRA. Just shop all carriers and tell us exactly what you're trying to achieve.
I've talked to a lot of people. I love that part of my job: figuring out how we can either fill in an income floor or contractually take care of a goal that you have in mind for your money.
A guy called me the other day, and here was his situation: he had a traditional IRA, and there was a lot in it. He had like $750,000 in that, and he had a Roth IRA and converted some of that. He had about $250,000 in his Roth IRA and wanted an Immediate Annuity, but he didn't know where to put it. He was getting ready to turn 70-and-a-half, so he needed to take a Requirement of Distributions. There's no perfect answer to any of this, just bad sales pitches.
With that being said, here's what I did. I gave him the opportunity to shoot it down if he wanted to, but in my opinion, since he's going to be 70-and-a-half and he's got RMDs. I told him, "Why not take the money?" And in this case, it was around $400,000, and put it into an Immediate Annuity? Because of what we had done, it was around that we reverse-engineered the quote. In other words, he said, "Stan, me and the wife need X amount per month." It was like $3,220, whatever the amount was, and we reverse-engineered it to show him the exact amount of money to create that contractual guarantee.
So, that's how we did it. And so, I said, "Do it out of the IRA because..." And I know there will be people arguing against it, whatever, but I think this is right. The $400,000 income is going to fully cover the RMDs for that $400,000. I told him to do all of his growth in his Roth IRA because he was still trading stocks and trying to find opportunities and get real market returns. Annuities are not growth products, in my opinion, market growth products. So, he was doing all of his growth stuff over here. Why? Because the Roth is tax-free, all of that stuff's growing tax-free, and he can take the money out tax-free. And then, he had an additional $350 that was a bit more conservative in which he's having to take RMDs from because the income stream covers the RMDs from the $400,000 fee. He liked that, and he thought that made sense.
Let It Grow
I genuinely believe that Roths should be used, if you can, for the growth, for your aggressive stuff because you've already stripped out the taxation on it. You've already paid the taxes, so let it grow. If you buy that stock that goes from five to 100, great, it's over on the Roth IRA side, and the gains are tax-free because it's inside of a Roth. And then, over on the Traditional IRA side, you can do things that can kill two birds with one stone, and in this case, create a lifetime income stream that covers the Required Minimum Distributions inside of the IRA. So, that's an example, and whatever your example is specific, let me know by booking a call with us. You can connect with me and give me your detailed information, and we'll run a strategy for you and connect if you want to do that.
So we talked about Roths, but I did a video recently I think you'll like called, How Much Money Do You Need For An Annuity? That's always a good question because one of the biggest things I see with people is they sometimes put too much money into an annuity. I know the sales gods are raining down, saying, "Oh, don't say that." It's true. I'm America's annuity agent for a reason. I'm brutally honest about these products. They're not for everybody. They're not perfect, but they certainly are good if fully explained and bought for their contractual guarantee. I encourage you to go to that video because it digs deeper into proportion, allocation, and the mistakes I see. We even covered laddering into a strategy as well just to prudently go about buying the annuity strategy.
I would love to have you as a client, but at the end of the day, I want you to understand what annuities do and what they don't do and make a good and informed decision on your own terms. So, with that, see you next 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.