Using a Roth IRA To Fund a FIA

Roth IRAs were created by the Taxpayer Relief Act of 1997¹ and became available in 1998. They’re a popular way to save for retirement because qualified withdrawals are tax-free. With more clients looking to protect savings and pass on a legacy, it’s worth knowing how a Roth IRA can be used to fund a fixed index annuity with an enhanced death benefit for legacy planning.

As of mid‑2024, 26% of U.S. households own a Roth IRA; that equals about 34.6 million households. ² Total Roth IRA assets reached around $2.0 trillion by the end of 2024³, reflecting just how widely used these accounts have become as tax-free retirement saving tools.

Some of your clients want principal protection and guarantees, and one way to accomplish that goal is to purchase an annuity.  However, if they have a Roth IRA that cannot hold an annuity, the funds in that Roth IRA can be transferred to another custodian through a trustee-to-trustee transfer. This type of transfer is client-friendly because:

• This transfer is not taxable
• There are no IRS penalties

Clients should, however be aware that some types of investments held in a Roth IRA, if they need to be liquidated prior to the transfer, like mutual funds, may still have fees and/or surrender charges.

The 5-Year Rule Explained⁴

To withdraw earnings tax- and penalty-free, the owner must be 59 ½ and at least 5 full tax years must’ve passed since Jan. 1 of the year the owner first funded any Roth IRA in their lifetime. Funding can happen through:

• A regular Roth IRA contribution
• A Roth conversion from a traditional IRA or similar account
• A rollover (such as from an employer plan)

It’s important to know that this single 5-year period applies to all of the owner's Roth IRAs. Once satisfied, earnings qualify for tax-free withdrawal. Contributions can be withdrawn at any time, tax-free and penalty-free.

Roth IRA death benefits for spousal beneficiaries are income-tax-free if the original owner satisfied the 5-year rule before death. The 5-year period carries over and does not reset for the spouse. This makes a Roth IRA a powerful tool not just for the account owner, but also for the people their beneficiaries.

A Legacy Planning Approach Using Roth IRA Assets and Enhanced Choice Index Plus

One option available at The Standard for legacy planning is to move Roth IRA assets into the Enhanced Choice Index Plus fixed indexed annuity, along with the optional Legacy Max Enhanced Death Benefit rider.

When the owner passes away, the surviving spouse may choose to:

• Continue the annuity contract only and have the annuity value reset the equal the death benefit amount
• Continue both the annuity contract and the Legacy Max death benefit rider – now payable upon death of the surviving spouse
• Receive the Legacy Max death benefit value, income-tax-free as long as the 5-year rule was met

This approach combines tax-free benefits and downside protection of a FIA with strong legacy planning features in a way that addresses what many clients are looking for — security for themselves and the people they love. It can be a good fit for clients who want to secure retirement savings and leave a meaningful, tax-efficient inheritance to their spouse or loved ones.