Can I Convert a Non-Qualified Annuity to a Roth IRA?

Roth IRAs can provide tax-free income during retirement.

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Annuities are investment contracts sold by insurance companies that promise to make periodic payments in exchange for your original investment. Like many other investments, you can purchase an annuity contract to fund a retirement plan such as a Roth Individual Retirement Account or as a stand-alone, non-qualified investment. Although non-qualified annuities don't provide tax-free growth that Roth IRAs can, the growth inside a non-qualified annuity is tax-deferred.


Not established as a qualified retirement plan, non-qualified annuities are purchased with after-tax money. Further, because non-qualified annuities are not subject to plan limitations, you can put as much money in a non-qualified annuity as the insurance company will allow you during any given year. Contributions to Roth IRAs are subject to a yearly dollar limit that can be restricted by your income.

Roth IRAs

An annuity is a type of investment vehicle, which can be tax qualified or not as described above. A Roth IRA, on the other hand, is a tax qualified plan, which may be funded using a variety of different vehicles including annuities. The tax benefit of Roth IRAs is that while you cannot deduct your contributions, your investment grows tax-free and you will not be taxed on qualified distributions. Qualified distributions include payments made to your beneficiary upon your death, meaning survivors aren't taxed on Roth IRA inheritances.


Many plans that grow tax deferred can be converted from one vehicle to another, without having to report a distribution. For example, you could convert a 401(k) retirement plan from a former employer into an individual retirement account without incurring the 10 percent tax penalty for early withdrawal. Conversions occur only between qualified plans, such as a traditional IRA to a Roth IRA. While you cannot convert a non-qualified annuity directly into a Roth IRA, you can use a non-qualified annuity to fund a Roth IRA.

Contribution Limits

You can contribute an aggregate maximum of $5,500 -- $6,500 if you’re older than 50 -- to all of your IRA plans in 2013 as long as you’re eligible. The limit may be adjusted from year to year. Because of this limitation, you may not be able to convert your entire annuity in one year. Annual contribution limits are further restricted by income. For example, in 2013 single taxpayers can make their maximum contribution if their taxable compensation is under $112,000 ($178,000 if married), a reduced amount if it’s between $112,001 and $127,000 ($178,001 and $188,000 if married), or no contribution if their taxable compensation is over $127,000 ($188,000 if married).


Although you cannot directly convert a non-qualified annuity to a Roth IRA, you can transfer your annuity to a Roth IRA by withdrawing your funds, paying the taxes on the growth and depositing the remainder -- up to your annual contribution limit -- in your Roth account. Your annuity company may offer a withdrawal option to automatically disburse a set amount each year until the annuity is empty. Although you must pay tax on the growth in your annuity when you convert, your original investment comes out tax-free, because you already paid taxes on it. Converting to a Roth IRA will allow you to withdraw future growth tax-free in retirement.