Roth IRA Annuity: Are the Payments Taxed?
Hi, there. Stan The Annuity Man, America's Annuity Agent, licensed in all 50 states. Glad you joined me today. We've got the clipboard out. You know what that means. That means I'm reading the questions and I'm answering the questions from the Stan The Annuity Man YouTube channel. This person is getting ready to be a star. I'm getting ready to read out their name and read their question. Yes, that could happen to you. All your dreams can come true. Put a question on our YouTube videos, and your question might be picked up.
So, here's the question from a person's name, E=MC. I wonder if he's a square. Get it? No. Okay, here we go. Here's the question. "When you," he's saying Stan The Annuity Man, "When you said fund from an IRA or other source, is my understanding correct that funding from a traditional IRA or a Roth IRA is not a taxed event? Instead, is the traditional IRA annuity payment fully taxable as income, and is the Roth IRA annuity payment tax-free monthly?"
That is a very good question, E=MC. Let's talk about Roth IRAs in general and my take on Roth IRAs. In a perfect world where unicorns chase the butterflies, Roth IRAs 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: non-annuities, stocks, mutual funds, ETFs, crypto, and all that stuff that can grow because you've already paid taxes on it. That's my personal opinion on Roths.
But if you put the loaded annuity gun to my head and said, "Stan The Annuity Man, I want to buy an annuity inside of my Roth," and that's the way your voice sounds, then we'll go, "Okay." Let's say you buy a lifetime income stream product from your Roth IRA using Roth IRA assets. That income stream will be tax-free, period, end of story. That's a good thing, and you can do that. But once again, in the perfect world that I live in, and you should live in, Roth IRAs should be for the growth portion of your portfolio.
Now, if you're using IRA money to purchase an annuity of any type, let me stop right there because there are a lot of advisors and stupid journalists out there who'll say, "Never put an annuity inside of an IRA ever." These people need to stop talking because they're making fools out of themselves. Why am I saying that? It's because the IRS and the Treasury Department developed an annuity called the Qualified Longevity Annuity Contract for use in an IRA, period. So, when people say, "Never put an annuity inside an IRA, Stan," you're stupid. You're dumb. Yes. If that's you, wake up. Smack you in the face. You can use annuities inside of an IRA, period.
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, a Fixed Rate Annuity inside of that IRA, you're buying it for the contractual guaranteed interest rate, CD-type interest rate. If you buy an Index Annuity inside an IRA, you buy 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 a 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 of your IRA.
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?" Well, we reviewed his total picture of what he has, investible assets, net worth, etc. And at the end of the process, I said, "Use your Roth IRA for growth assets, non-annuity assets. And let's buy the Immediate Annuity with the IRA assets. You can attach your spouse for joint lifetime income." It's a no-brainer for lifetime income because he was trying to assemble 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. Then, he purchased this Immediate Annuity inside his IRA for lifetime income. That's the income floor. That money's hitting every single month as long as they are breathing.
So, IRA, Roth IRA, it really comes down to me and you talking one-on-one, your customized situation. But if you have additional assets, whether it's non-IRA money or IRA money in addition to your Roth IRA, I'm going to tell you not to put the annuity in the Roth unless you have to, want to, or put a gun to my head. Roth IRA should be for market growth and non-annuity investments.
The only exception to that Roth rule, because there always is exception, right? Nod your head. If you put the annuity inside the traditional IRA and it would create a tax consequence that would bump you into another tax bracket, then maybe we look at the Roth IRA as a place for you to put the Immediate Annuity for lifetime income.
Once again, remember it's customizable. You can't, as an advisor, as an agent, as Stan The Annuity Man, as America's Annuity Agent say, "This is the rule." No. The rule is that there are contractual guarantees that you can put in place, but they are customizable to your specific situation. So, in that example where, if you said, "Well, I'd love to put it in the traditional IRA, Stan, but that's just another source of income that's going to be taxable. I really need a non-taxable income stream." Then, it might make sense for us to look at that Roth IRA asset for lifetime income. Schedule the call with me, and let's talk one-on-one.
Traditional and Roth IRAs
Let's look at traditional IRAs and Roth IRAs. In traditional IRAs, any money that comes out of the traditional IRA will be taxed at ordinary income levels. Any money coming out of the Roth IRA is going to be tax-free. It's really that simple, but that's where the conversation starts. And that's when we look at your overall portfolio and the goals 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 principal, you either want lifetime income, you might want a legacy, or you might want confinement care, long-term care, whatever that is. And that acronym I have is PILL, P-I-L-L, principal protection, income for life, legacy, long-term care, confinement care. Those are the things, in my opinion, that annuities solve for. They're not market-growth products. But 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." To me, RMDs, Required Minimum Distributions, is another form of lifetime income. It's another part of your lifetime income floor. So, if you have Social Security, which is an annuity, of course you do. If you have a pension from your company, which you're so fortunate to have, that's also an annuity. That's lifetime income. Your Required Minimum Distribution, the money you have to take from your IRA, is also a lifetime income stream. We can help you plan with that traditional IRA for your Required Minimum Distributions, using specific types of annuities for lifetime income, etc. Remember, Qualified Longevity Annuity Contracts were designed for use for future lifetime income pension needs inside of an IRA.
The bottom line is that if you have yet to catch it by now, we need to talk. You need to speak to the number one expert on the planet with all things annuity and America's Annuity Agent, Stan The Annuity Man.
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