The Roth IRA annuity sales guide

By Jason Smitka


Ben Franklin once said, "In this world nothing is certain but death and taxes." Obviously, Ben didn't have a Roth IRA! The Roth IRA is unique in that, if certain requirements are met, no income taxes are due when distributions are taken. No income taxes! That's a benefit that practically sells itself. Furthermore, it's a benefit that presents great opportunities for financial professionals to help their clients with annuity solutions.

Before you can determine whether or not an annuity is an appropriate vehicle for a client who has an existing Roth IRA, it's important to understand the mechanics of the Roth IRA itself.

This chart provides a brief summary:

The Roth IRA features outlined above present unique opportunities for potential annuity solutions. Some of these annuity sales ideas are obvious, such as using an annuity for safety of principal3. And, by using an annuity to fund a Roth IRA for clients older than 70½, the Roth can provide another savings option for a client who has maxed out contributions to an employer-sponsored 401(k) plan. These are all good ideas; however, other annuity sales opportunities might not be as apparent. Let's examine some of those.

The non-working spouse

Regardless of whether or not both spouses actually have taxable income, if a married couple files a joint tax return and is under the adjusted gross income (AGI) limit, then both spouses can have their own Roth IRA. The opportunity for a non-working spouse to set up their own Roth IRA is one that is often overlooked. This is important to address, however, because twice the contributions means twice the tax-free income down the road. Studies conducted by the Society of Actuaries indicate that for a married couple who are both age 65 today, at least one spouse has a 50 percent chance of living to age 92. That is where an annuity can come into play. Longevity, protection and safety of principal are critical needs that financial professionals can help their clients address with an annuity solution.

Tax-free, lifetime income

Guaranteed lifetime withdrawal riders (GLWR) have had a significant impact on fixed indexed annuity sales over the past two years. GLWRs have shown tremendous appeal for many reasons: They provide an income stream that cannot be outlived, no annuitization is required, the annuity owner maintains control and flexibility, and the income base typically features guaranteed growth until income is activated -- in some cases 6 percent and higher. These are benefits that prospects can easily identify with; thus, the industry has witnessed a rapid increase in the number of annuities purchased with a GLWR attached.

Now, consider how a GLWR can work with a Roth IRA. All of the same benefits apply, but the opportunity for tax-free withdrawals is added. The GLWR provides guaranteed growth of the income base for a set number of years or until rider income begins. Then, once income under the rider begins, the payments will come out of the Roth IRA as tax-free withdrawals4. Even if the annuity owner lives long enough to the point that the accumulated value of the annuity inside the Roth IRA reduces to zero, the tax-free income payments will keep coming for the rest of the owner's life4.

The Roth stretch

Roth IRAs are not subject to required minimum distribution (RMD) rules like traditional IRAs. Because Roth IRA owners do not have to begin taking RMDs at age 70½, and because distributions that their beneficiaries will eventually take from the Roth IRA are generally not subject to income tax, the opportunity to "stretch" a Roth IRA is one that goes easily unnoticed. However, unlike Roth IRA owners, Roth IRA beneficiaries are subject to RMD rules. Therefore, depending on the size of the IRA and the life expectancies of the beneficiaries, the total amount of additional wealth that might result from stretching an inherited Roth IRA (as opposed to taking a lump-sum distribution) could be considerable.

Even while the stretched distributions are coming out, the rest of the money in the Roth IRA continues to grow with applicable interest. By utilizing an annuity within a Roth IRA, financial professionals can help their clients guarantee stretch distributions that can both last throughout a beneficiary's life expectancy and create a substantial tax-free legacy.

Converting to a Roth IRA

Currently, traditional IRA owners can only convert to a Roth IRA if their annual gross income (AGI) is no more than $100,000. Beginning in 2010, however, that income limitation is expected to be eliminated. Furthermore, if converting in 2010, IRA owners won't have to pay the income tax that is normally due upon conversion until later. They can report one half of the taxable income in 2011, and the other half in 2012. This change of rules will open the door for financial professionals to help many of their clients convert to a Roth IRA.

There are many reasons to consider converting to a Roth IRA. Examples include transferring greater wealth to future generations, hedging against a projected increase in tax rates, and reducing the taxable estate of the IRA owner. Regardless of the reason, people will need help from financial professionals to determine whether or not the conversion will be beneficial. After all, there are many factors to consider. Does the client have outside funds to pay the income tax on the conversion? Will the client expect to be in the same or higher tax bracket in the future? Will they need the Roth IRA to meet living expenses? Take advantage of the Roth IRA conversion calculators that most annuity carriers provide. When you show your clients the potential benefits of converting to a Roth IRA, you will then have a natural transition to demonstrating the benefits of an annuity solution.

You -- The expert

By becoming an expert on Roth IRAs, you will avail yourself of more opportunities to get in front of prospects in the years ahead. Any solution that includes eliminating income taxes will get your clients' attention. By including an annuity solution in the mix, you can also show your clients how to protect their principal. Safe, tax-free money. That's a maxim even Ben Franklin would be proud of!

1 Annuities provide protection of principal if withdrawals in excess of the contract's free amount are not taken, as withdrawals may be subject to withdrawal charges, fees, and market value adjustment which affect contract values.

2 Income that cannot be outlived is possible if rider contact provisions are adhered to, specifically, not taking excess withdrawals.

This material has been prepared for informational and educational purposes only. It is not intended to provide and should not be relied upon for accounting, legal, tax or investment advice. Neither the company nor its agents or representatives may give tax, legal, accounting or investment advice. Encourage clients to consult with a professional specializing in these areas regarding the applicability of this information to their situation

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