Possible Roth IRA Expansion Could Deal A Blow To Annuities

Congressional tax writers drafting tax cut legislation are considering removing income limits for those investing in Roth IRAs as a revenue-raising tool, a development that some observers say could reduce middle-market interest in annuities.

Insurance industry officials and securities analysts caution that the move may be temporary, and those drafting the tax reconciliation package could go in another direction when they resume talks as Congress reconvenes this week.

Moreover, officials at the American Council of Life Insurers say the potential impact on annuity sales is “pure speculation.”

However, an expansion of Roth IRAs would reduce annuity sales to wealthier individuals who are currently not eligible for Roth IRAs, according to tax experts at Washington Analysis, a securities research firm that caters to buy-side clients such as pension and hedge funds.

Withdrawals from Roth IRAs after age 59.5 are not taxable, while withdrawals from annuities are taxed at the regular income tax rate.

According to Washington Analysis and ACLI tax experts, under current law, single taxpayers with annual incomes in excess of $110,000 and married filers with incomes of more than $160,000 are ineligible for the Roth IRA. Raising or otherwise modifying these limits would prompt additional transfers of money into tax-advantaged Roth IRAs at the expense of traditional IRAs, and at the same time, generate billions in tax revenue as assets in the traditional IRAs are taxed for the first time.

Such a shift of money into Roth IRAs would be a positive for mutual fund companies.

Michael Kerley, senior vice president, federal government relations, at the National Association of Insurance and Financial Advisors, said he doesn’t “want to speculate” on what Congress will do or when its work will be completed. “However,” he said, “I understand conferees are considering adding a provision to the conference report that will raise enough revenue during the period covered by the budget so that the package’s overall tax revenue loss would remain within the budget targets, and therefore not be subject to a budget point of order in the Senate.”

The provision most likely being considered for that “honor,” he said, is a provision allowing high-income taxpayers to convert their traditional IRAs to Roth IRAs.

“The conversion would take place under favorable terms but not favorable enough terms to avoid all the taxes they would pay under current law,” Kerley explains. The “one-time-only IRA conversion offer” would raise enough revenue to reduce the overall revenue loss of the package and maybe get past the budget point of order in the Senate, although that is by no means certain.