Q. I am 67 years old and have a small annuity. Is it worth transferring him to the Roth IRA at this stage? I’m still adding an annuity.
ANSWER: There are several questions that come into consideration here.
You didn’t say if this is your only savings or what other types of pension accounts and income you have. For this reason, you should consider meeting with a financial planner who only charges a fee and who can review your entire financial situation.
But here are some things to consider.
When it comes to annuities and pension accounts, it is very important to understand the type of account and the tax status that applies to it.
Qualified annuities are a type of pension savings account and pre-tax dollars are usually a source of funds, said Claudia Mott, a certified financial planner from Epona Financial Solutions of Basking Ridge.
“When you contribute to a qualified annuity, you may be able to deduct that contribution in your tax return or it may be deducted from your salary if it is an employer-sponsored plan,” she said. “When the dollars are withdrawn, they do it taxable as income. “
A traditional IRA is almost the same as a qualified annuity because dollars deposited in an account are often deductible – there are income limits that can affect deductibility – and money will grow on a deferred tax basis until distributions are taken, she said.
An unqualified annuity also ensures the growth of assets in the tax-protected account, but contributions are given in dollars after tax, Mott said.
“When withdrawals are made, earnings are taxed as income, but the return on investment is not,” she said. “Typically, the distribution payment will also consist of a return on principal and earnings.”
Similarly, dollars put into Roth IRA they are considered taxation and the bill will grow based on tax deferrals, she said. But one big difference is that the earnings collected in the Roth IRA are not taxed. To avoid taxing earnings, a five-year holding period must be adhered to, and the account holder must be 59 years old, ”she said. There are other exceptions to withdrawing money, such as buying a home for the first time or expenses related to the birth or adoption of a child.
So what does all this mean?
“A qualified annuity can be transformed into a traditional IRA, but they cannot be transferred directly to the Roth IRA because of the difference in the tax status of the contributions, ”Mott said. “If the annuity you have is not a qualified vehicle, you will have to cash it in, pay income tax and then deposit the earnings in the Roth IRA.”
The decision whether to save your dollars in a Roth IRA or continue to add an annuity depends on many factors, two of which would be your income tax rate and the potential distribution value you would get from both, Mott said.
“If you are in a high tax bracket, adding an annuity, part of which will have a distribution tax, will reduce the value of those dollars,” she said. “Roth IRA they do not have the necessary distribution and may be more tax efficient to allow money to grow until you need it and save on taxes when the money is withdrawn. “
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Karin Price Mueller writes Bamboozled column for NJ Advance Media and is the founder NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find it NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly e-newsletter.