Regulators Tighten Roth IRA Annuity Valuation Rules

The Internal Revenue Service wants taxpayers to be reasonable when they are moving variable annuities into Roth individual retirement accounts.[@@]

The IRS has issued a temporary regulation forbidding taxpayers from cutting their taxes by using complicated strategies to temporarily reduce the stated value of annuities shifted into Roth IRAs.

The IRS also has notified taxpayers and their advisors that it will be developing a proposal to make the restrictions in annuity valuations permanent.

The permanent regulation probably will allow a 9% adjustment in VA valuations to reflect the cost of potential surrender charges. But the upcoming guidance “will provide that in determining fair market value, the value of all additional benefits (such as guaranteed minimum death benefits) under the contract must be taken into account,” Cathy Vohs, an IRS official, writes in a preamble to the temporary regulations.

The U.S. Treasury Department, the parent of the IRS, has posted copies of the temporary and proposed regulations on the department Web site.

The regulations affect taxpayers who want to shift individual retirement annuities or variable annuities held within traditional individual retirement accounts into Roth IRAs.

Holders of Roth IRAs must pay federal income taxes before contributing income to the Roth IRAs. In return, the federal government promises not to tax Roth IRA retirement benefit payments.

When taxpayers move annuities from traditional IRAs to Roth IRAs, those taxpayers must include value of any annuities transferred in their taxable income.

In the past, many taxpayers have used VA cash surrender values as rough approximations of VA values.