Roth Conversions Using a Bonus Annuity
Jason Stolz CLTC, CRPC
Roth conversions using a bonus annuity can turn taxable retirement dollars into future tax-free income, and the upfront annuity bonus can help soften the sting of the conversion tax. At Diversified Insurance Brokers, we compare multiple carriers and design structures so you can see, in plain numbers, whether it makes more sense to convert first and then fund the annuity, or to fund the bonus annuity first and convert later. From there, we help you coordinate tax brackets, Required Minimum Distribution timing, and your overall guaranteed income strategy.
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What Is a Bonus Annuity?
A bonus annuity is a fixed or fixed indexed annuity that credits an immediate premium bonus—often in the 10%–30% range—on new deposits. For example, a $100,000 premium with a 20% bonus shows $120,000 on day one (subject to the contract’s vesting rules). In some designs, that bonus is added directly to the accumulation value, while in others it primarily boosts an income base that is later used to calculate lifetime withdrawals. A key step in planning is matching the bonus structure to your real objective: maximizing long-term growth, maximizing guaranteed income, or balancing both.
How the Bonus Interacts with a Roth Conversion
A Roth conversion moves money from a pre-tax IRA or 401(k) into a Roth IRA, creating taxable income today in exchange for future tax-free growth and qualified withdrawals. When you pair this with a bonus annuity, the bonus can help “rebuild” part of the value that is effectively lost to taxes—provided the bonus credits on day one and you design liquidity correctly. The decision is not only whether to use a bonus annuity, but also when to convert in relation to funding the contract, and how that fits with your overall bracket and RMDs after SECURE 2.0.
Convert First, Then Fund the Bonus Annuity
In the “convert first” approach, you convert pre-tax dollars to a Roth IRA, pay the tax on that amount, and then use the Roth funds to purchase a bonus annuity. The conversion amount is calculated on the pre-bonus balance, which keeps the taxable income lower, and the bonus then lands inside the Roth, where future growth and qualified income can be tax-free. For example, converting $100,000 and then funding a 20% bonus annuity with those Roth dollars gives you a contract starting at $120,000 inside the Roth. For many households, this path offers cleaner tax reporting and tighter control of the conversion bracket.
Fund the Bonus Annuity First, Then Convert Later
In the “fund first” approach, you start by placing pre-tax dollars into a bonus annuity inside a traditional IRA. The bonus credits immediately and increases the IRA contract value. Later, often in a lower-income year, you convert the now-larger post-bonus balance to a Roth IRA. This strategy can improve the Roth balance after conversion but increases the taxable conversion amount. For example, funding a $100,000 IRA annuity with a 20% bonus gives you $120,000 in the contract. If you then convert the full $120,000 when your income temporarily drops, you pay more tax than in the first scenario, but you also start with a larger Roth annuity value. This can make sense for clients with flexible income or well-defined Roth conversion windows.
Real-World Math Clients Want to See
Most clients want to understand whether the bonus is just marketing or if it genuinely improves their Roth outcome. Consider a larger case using a 16% bonus on $500,000. If you fund, then convert, you might see an $80,000 immediate credit and a $580,000 annuity value, followed by a larger taxable conversion. If you convert, then fund, you might pay tax on $500,000 first, then apply the 16% bonus to whatever is left after taxes are paid. Either way, with a bonus annuity you may end up with significantly more in the Roth than if you converted without using a bonus at all. The exact advantage depends on product design, vesting rules, and your bracket, which is why we model multiple carriers side by side.
10-Year Illustration Snapshot (20% Bonus, 5% Hypothetical Growth)
The table below shows a simplified comparison using a $100,000 starting point, a 20% bonus, and a hypothetical 5% annualized growth rate over 10 years. It is illustration-only—not a projection—but it helps visualize how timing and bonuses affect Roth balances.
| Scenario | Taxable Conversion | Day-One Annuity Value | 10-Year Roth Value* | Planning Notes |
|---|---|---|---|---|
| Convert First → Fund Bonus | $100,000 | $120,000 | ≈ $195,000 (tax-free) | Lower taxable conversion; bonus and growth occur inside the Roth. |
| Fund Bonus in IRA → Convert Later | $120,000 | $120,000 | ≈ $234,000 (tax-free after higher upfront tax) | Higher taxable conversion; potentially larger Roth balance if future tax rate is attractive. |
*Illustrative only. Not an indicator of future results. Contract rules, vesting, and crediting methods vary by carrier.
Details That Matter Before You Commit
Bonus annuities are not just about the bonus percentage. You also need to understand liquidity and free-withdrawal rules, including any built-in nursing home or terminal illness waivers that may help if life changes unexpectedly. Surrender schedules and market value adjustments can impact what you receive if you exit early. It’s important to know whether the bonus credits to the accumulation value, the income base, or both, and how long it takes to fully vest. If your goal is lifetime income, we’ll compare income riders against traditional annuitization and walk through rider vs. annuitize trade-offs in plain English. For clients spreading conversions over time, short-term fixed annuities or MYGAs can act as a “parking lot” while you phase conversions—see our guide to the best short-term MYGAs.
Who Tends to Benefit from This Strategy?
Roth conversions using bonus annuities are most attractive for pre-retirees and retirees who want to manage RMD exposure, fill up lower tax brackets today, and create future tax-free income later. The approach can appeal to households that value principal protection and measured index-linked upside instead of full market risk. It is also often used by couples who want to coordinate tax-free income with Social Security and pensions—especially when we show how Social Security and annuities work together in a unified plan. For the right client, the combination of a thoughtfully staged conversion schedule and a well-designed bonus annuity can create a predictable income foundation and a larger tax-free pool for later retirement years.
See Your Exact Numbers
We’ll model convert-first vs. fund-first, bonus types, liquidity, and income—side by side across multiple carriers.
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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.
About the Author:
Jason Stolz, CLTC, CRPC, is a senior insurance and retirement professional with more than two decades of real-world experience helping individuals, families, and business owners protect their income, assets, and long-term financial stability. As a long-time partner of the nationally licensed independent agency Diversified Insurance Brokers, Jason provides trusted guidance across multiple specialties—including fixed and indexed annuities, long-term care planning, personal and business disability insurance, life insurance solutions, and short-term health coverage. Diversified Insurance Brokers maintains active contracts with over 100 highly rated insurance carriers, ensuring clients have access to a broad and competitive marketplace.
His practical, education-first approach has earned recognition in publications such as VoyageATL, highlighting his commitment to financial clarity and client-focused planning. Drawing on deep product knowledge and years of hands-on field experience, Jason helps clients evaluate carriers, compare strategies, and build retirement and protection plans that are both secure and cost-efficient.
