Roth IRA Annuity: Are the payments taxed?

The question of the day is sent in from one of our subscribers from our Stan The Annuity Man YouTube channel. The question is, "When you said fund from an IRA or other sources, 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 monthly fully taxable as income? And is the Roth IRA annuity payment that's monthly tax-free?" That is an excellent question! Let's talk about Roth IRAs in general and my take on them.

In a perfect world where unicorns chase the butterflies, Roth IRAs, in my opinion, 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. Growth, meaning non-annuities, stocks, mutual funds, ETFs, crypto, etc., can grow because you've already paid taxes on it. That's my personal opinion on Roths. But if you've put the loaded annuity gun to my head and said, "Stan the Annuity Man, I want to buy an annuity inside of my Roth," then we'll go, "Okay." And let's just say you buy a lifetime income stream product from within your Roth IRA using Roth IRA assets. That income stream's going to be tax-free. Period. End of story. That's a good thing, and you can do that. But once again, in a perfect world that I live in and you should live in, Roth IRA should be for the growth portion of your portfolio.

Bad Advisors

Now, there are a lot of advisors and bad journalists that'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. When people say, "Never put an annuity inside of an IRA, Stan," they're not the brightest crayon in the box. Yes, if that's you, wake up. You can use annuities inside of an IRA. Period. And 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 purchasing 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're purchasing an Indexed Annuity inside an IRA, you're buying it for the Principal Protection and the CD-type returns. So, you can use IRA assets to buy an annuity. 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, 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?" 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 and 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 what he was trying to do was put together 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 with a Social Security number, and now this Immediate Annuity he purchased inside his IRA for lifetime income. That's the income floor that money's hitting every month as long as they breathe. So, IRA, Roth IRA, it really comes down to me and you talking one-on-one, your customized situation. But suppose you have additional assets, whether it's non-IRA money, IRA money in addition to your Roth IRA. In that case, 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. A Roth IRA should be for market growth non-annuity investments.

Exception

Okay, the only exception to that Roth rule, (because there always is an exception, right? Nod your head.) is that if you put the annuity inside the traditional IRA, it would create a tax consequence that maybe bumps you into another tax bracket. Then, we might 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 it's customizable to your specific situation. So, in that example where if you say, "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.

All right, so let's go back to the drawing board, the starting point of this whole video. Let's look at traditional IRAs and Roth IRAs. Traditional IRAs, any money that's coming out of the traditional IRA is going to be taxed at ordinary income levels. Any money coming out of the Roth IRA will 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, want lifetime income, or you might want confinement care, long-term care, whatever that is. And the acronym I have is PILL, P-I-L-L, Principal Protection, Income for Life, Legacy, Long-Term Care, and Confinement Care. Those are the things that an annuity solves for, and they're not market-growth products. And remember, traditional IRA money coming out, taxed at ordinary income levels, Roth IRA, tax-free.

Traditional IRAs and Roth IRAs

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 73, the IRS is going to tap you on the shoulder and say you have to take the Required Minimum Distributions from your IRA. RMDs, Required Minimum Distributions, is another form of lifetime income and part of your lifetime income floor. If you have Social Security, which is an annuity, and a pension from your company, which you're so fortunate to have, that's an annuity as well, and that's lifetime income.

Your Required Minimum Distribution is the money you have to take from your IRA is also a lifetime income stream. We can help you with that planning with that traditional IRA for your required minimum of distributions, using specific types of annuities for lifetime income, etc. And remember, Qualified Longevity Annuity Contracts were designed for future lifetime income pension needs inside an IRA. If you haven't caught 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. You can schedule a call with me to discuss every option for your specific needs.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.