Confused about Roth rollovers and applications

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Topic Author
relativeratio
Posts: 123
Joined: Wed Dec 02, 2020 12:13 am

Confused about Roth rollovers and applications

Post by relativeratio »

Bogleheads,

Ok, I understand that a direct transfer from one financial institution to another (such as a Roth to Roth) is pretty straight forward. What's confusing is when you enter the MYGA insurance world, do you check off on the application that your account transfer is Qualified or Non-Qualified when it's a Roth IRA?

I was under the impression that a Roth IRA would be qualified since their are qualified conditions to receiving your growth back tax free. But, I read up on it a bit and it seems the only distinction is whether the funds entering into a contract/account have been taxed already or not. If they have not been taxed as in the case of a TIRA/401k then it's Qualified. If the funds have already been taxed then non-qualified, so do I check off non-qualified when it's a Roth IRA? I think this would lead to the IRS thinking my later qualified withdrawals would be taxable. Will checking off non-qualified and subsequently checking off or indicating that it's a Roth IRA prevent the insurance company from reporting the proceeds as a taxable event?

When I get to the point that my MYGA matures and I want to roll it over to a new Roth IRA MYGA, do I designate the rollover as a 1035 exchange? Is the 1035 exchange only used for non-qualified funds in which the growth will be taxed in the future?

I believe I have already made the mistake of checking off on a couple of applications for MYGAs that the account would be qualified but in both those contracts I subsequently took advantage of the free look provisions and had the funds returned to the Roth account the funds came from-- Interest rates were taking off at the time. Anyway, I'm thinking no hurt done in those two instances.

So, I'd really prefer to not have to gather up 20 years of documents to show the IRS in order to prove the original funds were already taxed when I take qualified Roth distributions in the future. Just what do I check off on that application for the MYGA purchase to avoid these headaches in the future?

Also, will I need to use a 1035 exchange form for a Roth IRA MYGA transfer in the future?

Looking forward to your answers,

RelativeRatio
Topic Author
relativeratio
Posts: 123
Joined: Wed Dec 02, 2020 12:13 am

Re: Confused about Roth rollovers and applications

Post by relativeratio »

I spoke with a representative of immediateannuities.com and he told me that they have been dealing with these Roth MYGAs for years and that you choose Qualified on the application and Roth IRA. He said he understood what I was saying and that this is the way the application is filled out. He also told me I would not use a 1035 exchange for a rollover but a direct Roth IRA transfer to rollover in the future.

I also asked if I could transfer a 10% Roth withdrawal (if I have a contract that allows for this) from a Roth MYGA to another Roth MYGA instead of taking a distribution if interest rates are higher in a few years and he said, yes I could.

He also explained MVA to me and pointed out that Pacific Guardian does not have an MVA. I wonder if I should be concerned about choosing a MYGA without an MVA. I do plan on holding these contracts to maturity without taking out more than is allowed. But, maybe things will change and a MYGA contract without an MVA might have some advantage. What thinks the Bogleheads, and what thinks Stinky the annuity expert.

Meanwhile, I will have to contact that annuity company that was telling me the Roth IRA should be designated as non qualified. I wonder if these applications get the same result of entering into a Roth MYGA with different methods as long as in the end it shows as a Roth. Or, if I am getting the wrong information about the application process from the current annuity company I was planning on entering into a contract with.

Who's right?
Topic Author
relativeratio
Posts: 123
Joined: Wed Dec 02, 2020 12:13 am

Re: Confused about Roth rollovers and applications

Post by relativeratio »

Well, I spoke with another customer service rep at online only annuity company. She also told me that my Roth IRA interest will be taxed later because it is a Roth. She told me to mark non qualified funds for the Roth IRA MYGA. I explained to her that more experienced insurance agents are telling me to mark it as a qualified account. She said that is the way they do it there.

I asked to speak with a manager, none were available, I asked to have a manager call me and she suggested I call them Monday. I asked her if she thought this was good customer service to ask me to call back Monday. She said, well none are available.

Maybe this is a red flag as to how they run their company. Is a 300k annuity purchase worth trying a little harder to get the right answers for a customer? Would it be too big an inconvenience to research what she is saying to make sure she is giving me the right answer? Is it too much trouble to email a manager and ask them to call me?

Ugh, good customer service is hard to find. The best customer service I've ever gotten is from Vanguard. I wish they sold MYGAs.
Alan S.
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Re: Confused about Roth rollovers and applications

Post by Alan S. »

Since a Roth IRA can be funded from either a qualified plan (pre tax 401k or Roth 401k etc) or another TIRA or Roth IRA, you might consider this box NA (not applicable).

The critical issue is that the Roth IRA annuity clearly shows in the title that it is a Roth IRA. IRA annuities of all types are controlled by the IRA tax rules, which can differ from annuities in qualified plans and also from NQ annuities. These tax rules are more closely related to those of qualified plans than NQ plans, so entering NA next to the qualified box creates a problem, I would go with the immediate annuity reps recommendation to check the qualified box. Again, the only thing that really matters is that the new account is a Roth IRA annuity, and of course the terms of the annuity you purchase within that account.

Historically, qualified annuities were purchased with pre tax money from qualified retirement plans. Obviously, when Roth IRAs were introduced in 1998 and were funded with post tax dollars, the old definitions should have been mothballed, but they weren't.
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Stinky
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Re: Confused about Roth rollovers and applications

Post by Stinky »

I’ve purchased MYGAs with both taxable and IRA money. Never has a problem with filling in an application and getting the policy issued correctly when I worked through an agent (I’ve primarily used Blueprint Income). Agents should understand the ins and outs of the various insurance company’s application forms, so they can guide you through things that are not straightforward and correct any errors you initially make in filling in the app.

I haven’t purchased a MYGA with Roth funds, so I have no experience to share. Using an agent, I expect it would be straightforward.

The one time I had some confusion was when I applied for a MYGA using IRA funds with Canvas/Puritan Life. They properly pulled the funds from my Vanguard IRA, but they initially issued the policy as a regular taxable policy. About a week later, they discovered their mistake in issuing the taxable policy, voided it, and reissued as an IRA policy. This all happened in very early 2021, and I hope that Puritan has reformed their internal procedures in the 18 months since then to eliminate such mistakes.

I’ve also purchased from Gainbridge/Guggenheim and had no problems with them.

About MVAs - they have a tendency to work against the consumer, especially when interest rates rise after the policy is issued. Most insurers include MVA clauses in their MYGA policies as a risk mitigation strategy. Pacific Guardian is the only company I know of that doesn’t have an MVA on its MYGAs. Of course, the MVA clause comes into play only if there is a full or excess partial surrender before the policy matures.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
relativeratio
Posts: 123
Joined: Wed Dec 02, 2020 12:13 am

Re: Confused about Roth rollovers and applications

Post by relativeratio »

Alan S. wrote: Thu Aug 18, 2022 9:34 pm Since a Roth IRA can be funded from either a qualified plan (pre tax 401k or Roth 401k etc) or another TIRA or Roth IRA, you might consider this box NA (not applicable).

The critical issue is that the Roth IRA annuity clearly shows in the title that it is a Roth IRA. IRA annuities of all types are controlled by the IRA tax rules, which can differ from annuities in qualified plans and also from NQ annuities. These tax rules are more closely related to those of qualified plans than NQ plans, so entering NA next to the qualified box creates a problem, I would go with the immediate annuity reps recommendation to check the qualified box. Again, the only thing that really matters is that the new account is a Roth IRA annuity, and of course the terms of the annuity you purchase within that account.

Historically, qualified annuities were purchased with pre tax money from qualified retirement plans. Obviously, when Roth IRAs were introduced in 1998 and were funded with post tax dollars, the old definitions should have been mothballed, but they weren't.
Alan, thanks for your input. I agree with you. I should check the qualified box and the Roth IRA box. Canvas wants me to check the non-qualified box and then check the other box and enter Roth IRA. It just seems like that this will lead to problems with the IRS. I have been real careful to not make mistakes with my Roth up until now and I think I will just have to go with another company and use an experienced agent to avoid any pitfalls with the Roth application process.
Stinky wrote: Thu Aug 18, 2022 10:04 pm I’ve purchased MYGAs with both taxable and IRA money. Never has a problem with filling in an application and getting the policy issued correctly when I worked through an agent (I’ve primarily used Blueprint Income). Agents should understand the ins and outs of the various insurance company’s application forms, so they can guide you through things that are not straightforward and correct any errors you initially make in filling in the app.

I haven’t purchased a MYGA with Roth funds, so I have no experience to share. Using an agent, I expect it would be straightforward.

The one time I had some confusion was when I applied for a MYGA using IRA funds with Canvas/Puritan Life. They properly pulled the funds from my Vanguard IRA, but they initially issued the policy as a regular taxable policy. About a week later, they discovered their mistake in issuing the taxable policy, voided it, and reissued as an IRA policy. This all happened in very early 2021, and I hope that Puritan has reformed their internal procedures in the 18 months since then to eliminate such mistakes.

I’ve also purchased from Gainbridge/Guggenheim and had no problems with them.

About MVAs - they have a tendency to work against the consumer, especially when interest rates rise after the policy is issued. Most insurers include MVA clauses in their MYGA policies as a risk mitigation strategy. Pacific Guardian is the only company I know of that doesn’t have an MVA on its MYGAs. Of course, the MVA clause comes into play only if there is a full or excess partial surrender before the policy matures.
Stinky, I wouldn't have any issues opening a qualified TIRA or regular non qualified plan with them for a 3 year term and well within the limits of the state guarantees. But, for my Roth, as it stands, my gut says no. A good well experienced agent working with more mature and stable companies is the route I will take.

Thanks for explanation of MVA clauses. I think this will be irrelevant for me since I will hold until maturity and not withdraw more than what is allowed penalty free.
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