Examining a Popular Annuity Strategy for Roth Conversions
Does the Bonus Really Pay the Tax?
By Jared Prazen | Secure Retirement Planners
If you’ve been looking into Roth conversions, you may have heard a pitch like this: move your IRA into an annuity with a big bonus, convert it to a Roth over a few years, and let the bonus pay the tax. It’s a compelling idea.
We’re big believers in Roth conversions when they’re done right. In this video, we walk through how this pitch actually works, and the questions worth asking before you sign anything.
The test every conversion should pass
A Roth conversion makes sense when the tax rate you pay today is the same or lower than the rate you’d likely pay later on that same money. The bonus pitch tends to skip that test, because when the tax feels free, nobody asks what rate they’re paying.
On paper, it looks like a wash
In our hypothetical example, a married couple, both 64, moves $750,000 into an annuity with a 25% bonus: $187,500 credited to the account. Converting it all over five years produces about $194,591 in federal tax. In year one, it really does look like the insurance company paid the tax.
But insurance companies don’t give away $187,500. If a car dealer offered to pay your sales tax, you’d wonder what you were paying for the car. The cost shows up elsewhere in the contract, and even a true gift wouldn’t answer the bigger question: should you pay this tax, at this rate? In our example, the top dollars of each conversion are taxed at 24%, the extra income triggers about $20,640 in Medicare surcharges, and without converting this couple would likely be in the 22% bracket later.
The bonus isn't free
Lower caps. On the bonus annuity we reviewed, the S&P 500 annual cap is 5.5%. On another annuity we reviewed, with a shorter term and no bonus, it’s 9.5%.
An annual rider fee. The free withdrawals this strategy relies on cost about 0.95% a year. Higher-participation index options charge another 1.25%.
Vesting. None of the bonus is vested for the first six years, with surrender charges of up to 10% along the way.
With no index credits, the rider fee alone takes the guaranteed value from $937,500 to $852,150 by year 10, about $85,000, or nearly half the bonus. And over actual S&P 500 returns from 2016 to 2025, the no-bonus annuity caught up with the 25% bonus version by year 6 and the 22% version by year 8. A bonus is a head start. A lower cap is a speed limit.
Check the rate behind the illustration
The illustration for the bonus product showed 8.76% a year, based on 10 years of index history. But more than half of that allocation uses indexes with only about 3½ years of real history; the rest is back-tested. The carrier’s own numbers put these strategies’ actual average since launch at about 3.6% a year, before the rider fee.
Who are you converting for?
For our example couple, converting at the pitch’s pace left the family about $39,000 behind at 85 and $95,000 behind at 90, after all taxes, if their heirs pay about the same 22% rate. If their heirs are in a higher bracket, around 32%, converting comes out ahead. That’s a real planning question, and the bonus has nothing to do with it.
What a well-built conversion plan looks like
It passes the rate test.
It’s sized year by year, often filling a tax bracket while staying under the Medicare surcharge thresholds.
The tax is paid from the right place, ideally savings outside the IRA.
It stands on its own, regardless of which product the money ends up in.
It’s timed around your income plan, often in the lower-income years before Social Security or required withdrawals begin.
None of that requires a bonus. In fact, the simplest test is to take the bonus away: does the conversion still make sense on its own? Does the annuity?
Questions to ask about any Roth proposal
What rate am I converting at, and what would I likely pay later?
Where does the tax money come from, and when is the bonus fully vested?
Are the “convert” and “don’t convert” versions invested the same way?
If the tax is paid from other money, is that money’s lost growth counted?
What tax rate does it assume my heirs will pay?
What growth rate does it assume, and how much is back-tested?
And remember: a Roth conversion can’t be undone.
Another question worth asking
If you took the bonus away, would the plan still make sense? We help clients with Roth conversions at the right rate and the right pace for their situation. If you’re not sure about yours, that’s exactly the conversation we have with every family we work with.
Keep watching: Why the order of returns you experience in retirement is so important:
About the author:
Jared Prazen is a financial advisor with Secure Retirement Planners, focused on retirement income planning for people approaching or already in retirement. He helps families build plans that cover their essential expenses with predictable income, so the rest of their money can be managed with a clear plan.
Hypothetical illustration for discussion only; not tax advice and not any actual account. Example: married couple, both 64; $750,000 IRA; 25% premium bonus; five equal conversions; $90,000 of other income; $48,000 of Social Security from 67; 2026 federal tax rules indexed 2.5% a year; 5% assumed growth for after-tax wealth comparisons. Annuity figures come from current rate sheets and a carrier illustration for two fixed indexed annuities (Sept.–Oct. 2026; Florida schedules); products not named; rates subject to change. Head-start comparison uses S&P 500 calendar-year price returns, 2016–2025, with current caps assumed to continue. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company; annuities have fees, surrender charges and limitations. Indexes are unmanaged and cannot be invested in directly. Past performance does not guarantee future results. We do not provide tax or legal advice; consult a tax professional. Investment advisory services offered through StrongHold Capital Partners, a Registered Investment Advisor.
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This material is provided for educational purposes only and does not constitute individualized financial, legal, or tax advice. Investment strategies involve risk, including possible loss of principal. Availability of strategies depends on individual suitability and applicable regulations. Insurance products, if applicable, are issued by properly licensed insurance companies. Guarantees are based on the claims-paying ability of the issuing insurer.