How to Use a Roth IRA to Fund a SPIA
SPIAs, or single-premium immediate annuities, are contracts between you and an insurance company in which you exchange a sum of money now for the promise of a stream of income starting from this year into the future--often for the rest of your life or the joint lifetimes of you and your spouse or loved one. They are especially useful for controlling longevity risk--the risk that you will outlive your money.
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Instructions
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Evaluate the tax consequences. A Roth IRA grows tax free and generates tax-free income. If you purchase the SPIA outside the IRA, then the portion of the SPIA income attributable to earnings will be taxable as income. If you purchase the SPIA within the Roth, on the other hand, the entire income from the SPIA may be tax free. If you are using the SPIA to pay premiums on life insurance, you cannot hold life insurance within an IRA.
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Gather records. At a minimum, you will need the current balance of your Roth IRA account, the company acting as custodian and the account number. If you have funded your Roth IRA with an annuity, you will need the contract number.
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Select a SPIA product. Consider the financial strength rating of the insurance company, guaranteed payout rates and liquidity provisions--e.g., what your options are if you have an emergency and need to accelerate your income stream.
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Decide how much inflation protection you want. You can choose no inflation protection, which has the highest payout now, but which remains level for the life of the contract, regardless of what happens with inflation, or you can choose to have income increase by a few percentage points each year.
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Choose a payout option. The SPIA can pay income for a specified number of years, or for your lifetime, the life of a spouse or loved one, or the combined life expectancies of you and a loved one.
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Fill out an annuity application. A licensed insurance agent can guide you through the paperwork. Ensure you have checked the correct boxes.
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Tips & Warnings
While SPIAs can be effective in some situations, their use is very dependent upon the facts in individual cases. We recommend you seek the services of a qualified tax adviser.
When you buy a SPIA, you are giving up control of that lump sum of money. You also generally cannot pass a SPIA balance on to your children (though some companies will return the amount of premium that has not been paid out to the estate). Some people use SPIAs to fund life insurance premiums, however, to ensure a tax-free cash inheritance to their heirs. If you buy life insurance, though, you cannot do it within a Roth IRA. However, cash value buildup and distribution from a life insurance policy is generally tax free.
