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Exploring the Benefits of a Partial Internal Roth Conversion Annuity

Exploring the Benefits of a Partial Internal Roth Conversion Annuity


In the world of retirement planning, having a variety of tax-efficient strategies at your disposal is crucial. One such strategy, which we refer to as a Partial Internal Roth Conversion Annuity (PIRCA), can offer significant advantages. The PIRCA is not just another retirement product; it’s a powerful tool that allows for strategic, phased conversions of your IRA into a Roth IRA, potentially providing substantial tax benefits and long-term financial security.

What is a PIRCA?

A PIRCA allows you to gradually convert portions of your IRA into a Roth IRA over several years within the same annuity. This phased approach offers flexibility, enabling you to manage your tax liabilities more effectively by choosing the most tax-advantaged amounts to convert each year. Unlike traditional lump-sum conversions, which could push you into a higher tax bracket in a single year, a PIRCA lets you spread the tax impact across multiple years, potentially keeping you in a lower marginal tax bracket.

Key Benefits of a PIRCA

  1. Tax-Free Income in Retirement: One of the primary advantages of converting to a Roth IRA is that qualified withdrawals are tax-free. This means that when you take money out of your Roth IRA in retirement, you won’t owe taxes on those withdrawals, provided you meet the required criteria. This can be particularly beneficial if you anticipate being in a higher tax bracket during retirement or if you want to avoid taxes altogether on your retirement income.
  2. Protect Your Social Security from Additional Taxes: Another critical benefit of a Roth IRA is that withdrawals do not count as taxable income when determining the taxation of your Social Security benefits. This could help protect your Social Security income from being taxed at higher rates. Many retirees are surprised to learn that up to 85% of their Social Security benefits could be subject to taxes, depending on their total income. By strategically converting to a Roth IRA, you can potentially reduce or even eliminate these taxes, keeping more of your hard-earned money in your pocket.
  3. Prevent Medicare Premium Increases: Medicare premiums are also income-based. If your income exceeds certain thresholds, you could be subject to higher Medicare premiums. Since Roth IRA withdrawals do not count as income, using a PIRCA strategy to build tax-free retirement income could help you avoid these premium increases, ensuring that you don’t pay more than necessary for your healthcare in retirement.
  4. Staying in a Lower Marginal Tax Bracket: The phased conversion strategy inherent in a PIRCA can help you avoid pushing yourself into a higher tax bracket in any given year. By spreading the conversions over several years, you can stay within a lower tax bracket, thereby reducing your overall tax burden and preserving more of your retirement savings from the IRS.
  5. Protection Against Rising Future Tax Rates: Tax rates can change over time, and with the national debt and other economic factors, some experts predict that rates may increase in the future. By converting to a Roth IRA now, especially through a phased approach like a PIRCA, you can lock in the current tax rates, potentially shielding yourself from higher taxes down the road.
  6. Principal Protection: The PIRCA products we recommend are typically Fixed Annuities, which offer guaranteed principal protection. This means that, regardless of market fluctuations, your principal investment is secure, providing you with peace of mind that your retirement savings are protected.

How a PIRCA Works: A Hypothetical Example

Let’s say you have a $100,000 IRA and you decide to use a PIRCA within a 10-year term Fixed Index Annuity. Over the course of seven years, you strategically convert portions of your IRA to a Roth IRA as follows:

  • Year 2: Convert $13,000
  • Year 3: Convert $15,000
  • Year 4: Convert $5,000
  • Year 5: Convert $15,000
  • Year 6: Convert $19,000
  • Year 7: Convert the remaining balance

By the end of year seven, your entire $100,000 IRA is now in a Roth IRA. The funds can continue to grow tax-free, and when you start taking distributions in retirement, those distributions will be tax-free as well.

Conclusion: Strategic Tax Planning with a PIRCA

A Partial Internal Roth Conversion Annuity (PIRCA) is more than just an annuity; it’s a strategic tax planning tool that can help you create tax-free income in retirement, protect your Social Security benefits, avoid higher Medicare premiums, and keep you in a lower tax bracket. By choosing a phased conversion strategy, you can maximize the tax advantages and preserve more of your savings for the future.

If you’re interested in exploring how a PIRCA might fit into your retirement plan, we invite you to schedule a meeting with us. Let’s discuss your unique situation and see how this strategy can help you achieve your financial goals.

The commentary on this blog post reflects the personal opinions, viewpoints and analyses of the author, Veronica Aguilera, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security, or any security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Foundations deems reliable any statistical data or information obtained from or prepared by third party

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