IRA and Annuity Tax Planning


by David D. Holland



As a CPA and CFP® practitioner, I often get tax questions about ROTH IRAs, inherited IRAs, and deferred annuities – including, whether Required Minimum Distributions (RMDs) apply to them.


Let me start with ROTH IRAs. One of the key features of a ROTH is that there are no RMDs. Why? Because 1. the government wants to encourage people to save; and 2. you’ve already paid income taxes on your ROTH contributions. And, as long as you follow the rules, you and your heirs don’t pay income taxes on the growth of a ROTH IRA.


Holland Financial

Next up are inherited IRAs. They do have RMD requirements. Just as it is for IRA owners over the age of 70½, a percentage must be withdrawn each year from an inherited IRA. How much? That will depend on several factors, including the age reached by the original IRA owner before he or she died, as well as the age of the IRA’s beneficiary.


Now, for the annuity. You can put either IRA or “regular” (after-tax) money into an annuity. There are no RMD requirements for annuities if you’ve purchased them with after-tax money. Tax-deferred annuities (fixed annuities, index annuities, or variable annuities) are treated differently than retirement accounts under current tax laws. Money invested in any of these three types of annuities can grow tax-deferred until you take money out. A lot of people put their IRAs into annuities. Putting your IRA funds into an annuity doesn’t change it from being an IRA . . . your IRA simply “owns” the annuity. Tax-wise, a CD, mutual fund, stock, and an annuity are all treated the same way when owned in an IRA.


Tax treatment will be different, however, for a CD, mutual fund, stock, or an annuity when any of these assets are purchased with after-tax money. For example, a CD earns interest that is taxed as “ordinary income.” A mutual fund may have interest, dividends, and/or capital gains. Each of these types of earnings will have its own tax treatment. Stocks may have dividends, as well as the potential for capital gains or losses.


It’s a lot to ponder, isn’t it? If you have specific questions, please call Steve Tacinelli, our VP of Tax Services. Steve is a CPA and he’s been with my firm for nearly ten years. He’ll be happy to assist you with your tax questions!


Have a financial question you'd like answered here? Email: