It is important to be aware of this potential tax strategy with protections that I call a “Partial Internal Roth Conversion Annuity (PIRCA)”. I believe it is better to have more tax choices with protections, as opposed to too few to no choices at all.
A PIRCA, can allow you the option of converting various dollar amounts of your IRA to a Roth IRA in various years all in the same annuity. This could help you in tax planning by analyzing the optimal amounts to convert in various years that could be most tax advantaged to you. With a goal of eventually creating more tax-free income. That in turn, could save you more in future tax liabilities with proper planning.
Otherwise, most annuity and insurance companies only allow you to do a one-time lump sum conversion. A lump sum conversion could cause a very large tax liability based on your own tax brackets and tax situation. It is very important to be aware that only some annuity and insurance companies offer what we call a PIRCA.
This strategy could help protect you from potential future tax rising rates. A PIRCA could also help you in potentially reducing your social security benefits taxation. The reason being is that Roth IRA money, when withdrawn based on meeting the regulation criteria; does not count against your social security benefits tax. Many people are unaware that social security benefits can be taxed as high as 85%.
With the PIRCA’s that we utilize, they are selected types of Fixed Annuities. A PIRCA could be a Fixed Income Annuity (lifetime income stream) and/or a Fixed Index Annuity (various growth opportunities based on various indices). We only use PIRCA’s that guarantees principal protection by the annuity and insurance company.
Here is a hypothetical PIRCA example:
You have a $100,000 IRA 10-year term PIRCA Fixed Index Annuity.
- Convert $13,000 in year 2 to a Roth IRA
- Convert $15,000 in year 3 to a Roth IRA
- Convert $5,000 in year 4 to a Roth IRA
- Convert $15,000 in year 5 to a Roth IRA
- Convert $19,000 in year 6 to a Roth IRA
- Convert the remaining in year 7 to a Roth IRA
After 7 years, all of the money is now a Roth IRA. The money can continue to grow and be taken out in the future (meeting regulation criteria) as tax free.
As a reminder, an IRA to Roth IRA conversion does count as taxable income (majority of the time). Also, this is again an insurance product which may help you be more strategic in your tax planning.
If you would like to learn more and discuss your own situation, then please schedule a meeting with us at LoveLightFlourish.com.
This is all educational and awareness only. This is not financial, tax, or legal advice.
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