Roth Conversions Using a Bonus Annuity
Jason Stolz CLTC, CRPC
Roth conversions using a bonus annuity can be one of the most efficient ways to turn taxable retirement dollars into future tax-free income. At Diversified Insurance Brokers, we often illustrate this approach for clients who want to maximize the benefits of both—tax-free Roth growth and upfront annuity bonuses that enhance conversion value.
What Is a Bonus Annuity?
A bonus annuity is a type of fixed or indexed annuity that provides an immediate premium bonus—often between 10% and 20%—on new funds deposited. For instance, a $100,000 deposit could earn a 20% bonus, crediting your contract with $120,000 on day one. This bonus is typically vested over a period of years but instantly increases the growth base or income value for future distributions.
How a Bonus Annuity Fits into a Roth Conversion
A Roth conversion moves funds from a traditional, tax-deferred account (like an IRA or 401(k)) into a Roth IRA, where future growth and withdrawals are tax-free. When combined with a bonus annuity, the structure can create additional leverage—especially when the annuity bonus is applied immediately after the conversion.
Example 1: Converting Before the Bonus Annuity
Let’s say you convert $100,000 from your traditional IRA to a Roth IRA this year. You’ll pay taxes on that $100,000 at your current tax bracket. Once the funds are inside your Roth IRA, you purchase a 20% bonus annuity. The insurer credits $120,000 into your contract on day one—without additional tax since Roth dollars are already post-tax. Now all growth and distributions from that $120,000 are fully tax-free for life.
This approach can supercharge Roth compounding while avoiding future Required Minimum Distributions (RMDs) and giving you predictable, tax-free retirement income.
Example 2: Converting After Funding the Bonus Annuity
Alternatively, you could fund a 20% bonus annuity first using traditional IRA dollars, bringing your account value from $100,000 to $120,000 within the annuity. Then, you convert the entire $120,000 value to a Roth IRA in a later year. The key difference: your taxable conversion amount is now $120,000 instead of $100,000—potentially pushing you into a higher bracket that year.
This method might still be beneficial if your bonus annuity includes income or accumulation bonuses that offset the tax impact over time. However, timing and tax modeling become critical to prevent bracket creep or Medicare IRMAA surcharges.
When Each Strategy Works Best
Convert First, Then Fund the Bonus Annuity — Best when you have room in your current tax bracket and want all future growth to be tax-free immediately. You pay tax on the lower base amount before the bonus is applied.
Fund First, Then Convert — Best when the bonus annuity’s structure is strong enough to justify higher taxable conversion value later. Works well if your income will drop in retirement, opening a lower-bracket conversion window down the road.
Case Study Comparison
Here’s a side-by-side look at the outcomes for a $100,000 IRA, assuming a 20% bonus annuity, 5% annual growth, and a 10-year horizon:
| Scenario | Initial Deposit | Bonus Applied | Taxable Conversion Amount | 10-Year Roth Value |
|---|---|---|---|---|
| Convert Before Bonus | $100,000 | 20% = $20,000 | $100,000 | ≈ $195,000 (tax-free) |
| Fund Then Convert | $100,000 | 20% = $20,000 | $120,000 | ≈ $234,000 (tax-free after higher upfront tax) |
In the second case, even though the final Roth value is higher, the upfront tax burden is greater. Many clients prefer the first approach to keep conversions manageable while still capturing the annuity bonus inside the Roth.
Why Timing and Product Selection Matter
The key to this strategy is choosing an annuity with a genuine 20% upfront bonus—not just a deferred accumulation bonus—alongside liquidity provisions and strong carrier ratings. Explore our highest bonus FIA rates for current offers from top insurers. Each product has unique vesting schedules and crediting strategies that affect how the bonus interacts with conversion planning.
Who Should Consider This Strategy?
- Pre-retirees or retirees with significant traditional IRA or 401(k) balances
- Investors in lower tax brackets temporarily (before Social Security or RMDs)
- Individuals wanting tax-free income later while securing guaranteed growth now
- Clients evaluating long-term tax diversification between taxable, tax-deferred, and tax-free assets
Related Topics to Explore
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FAQs: Roth Conversions Using a Bonus Annuity
What is a 20% bonus annuity?
A 20% bonus annuity credits an extra 20% to your contract immediately upon funding. For example, a $100,000 deposit becomes $120,000 on day one, subject to the carrier’s vesting schedule.
Should I convert before or after funding a bonus annuity?
Most clients convert first, then fund the annuity to keep the taxable conversion amount lower. However, converting after funding can make sense if you expect to be in a lower bracket later or the annuity offers lifetime income enhancements.
Does the annuity bonus itself create a tax liability?
No. The bonus isn’t directly taxable; taxes apply only to the amount converted from pre-tax to Roth. Once inside the Roth, growth—including the bonus—is tax-free.
Can I use qualified (IRA) money to fund a bonus annuity?
Yes. You can fund a qualified bonus annuity using IRA dollars, but any Roth conversion will trigger income tax on the converted amount.
Are bonus annuities safe?
Bonus annuities are backed by the issuing insurance company’s financial strength. Always review carrier ratings and surrender terms before committing.
Do all bonus annuities offer the same 20% credit?
No. Bonus percentages vary by product and carrier. Visit our highest bonus FIA rates page for current offerings.
Will a bonus annuity affect my Required Minimum Distributions?
Yes. If funded with traditional IRA money, RMDs will still apply. After conversion to a Roth IRA, however, RMDs no longer apply to that portion.
Can I combine multiple annuities in one Roth?
Yes. You can convert multiple annuities into one Roth IRA or maintain separate Roth contracts for different time horizons or income riders.
How long must I hold the annuity to keep the bonus?
Most annuities vest the bonus over a period (commonly 7–10 years). Early surrender may reduce or forfeit unvested bonuses.
Who is this strategy best suited for?
It’s ideal for investors seeking both guaranteed growth and long-term tax-free income, especially those with IRA assets who want to accelerate Roth growth efficiently.
