Tax Tactic PIRCA
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.
Key Benefits of a PIRCA
- Tax Flexibility: Convert different amounts each year based on what is most tax-advantaged for you.
- Reduced Tax Liability: Avoid the large tax hit that often comes with a one-time lump sum conversion.
- Future Tax Protection: Shield your income from the impact of rising future tax rates.
- Social Security Tax Savings: when meeting regulatory requirements, Roth IRA withdrawals don’t count as taxable income and can potentially reduce the taxation of your Social Security benefits.
Beneficial Strategies
Most annuity and insurance companies only offer one-time lump sum conversions, which can result in significant tax liabilities, depending on your tax bracket. With a PIRCA, you have more control over your tax strategy. However, it’s important to note that only select annuity and insurance providers offer this option.
Hypothetical Example of a PIRCA Strategy: Imagine you have a $100,000 IRA invested in a 10-year term PIRCA Fixed Index Annuity.
Here’s how you could structure your Roth conversions:
- Convert $13,000 in year 2
- Convert $15,000 in year 3
- Convert $5,000 in year 4
- Convert $15,000 in year 5
- Convert $19,000 in year 6
- Convert the remaining amount in year 7
After seven years, all your funds would be in a Roth IRA, ready to grow tax-free and available for tax-free withdrawals, as long as regulatory requirements are met.
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