You can convert an annuity to a Roth IRA if the annuity is held inside a qualified retirement plan such as a traditional IRA, 401(k), or 403(b). The untaxed portion of the money becomes ordinary income in the year of the conversion, but there is no income limit and no dollar cap on how much you can move. Annuities bought with after-tax money outside a retirement plan cannot be converted at all.
Which Annuities Qualify
The rule turns on one question: is your annuity held inside a qualified retirement account?
A qualified annuity is funded with pre-tax dollars inside an employer plan (like a 401(k) or 403(b)) or a traditional IRA. The IRS treats those funds as retirement plan assets, so they are eligible for rollover into a Roth IRA under the federal conversion rules.1Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
A non-qualified annuity is purchased with after-tax money outside any retirement plan. It doesn’t meet the IRS definition of an eligible rollover distribution and cannot be converted to a Roth IRA. Pulling money from a non-qualified annuity is just a taxable distribution.
If you’re not sure which one you own, call your annuity carrier and ask whether the contract is held inside a qualified retirement plan. That single answer tells you whether a conversion is even on the table.
No Income Limit, No Dollar Cap
Direct contributions to a Roth IRA phase out at higher incomes, but Roth conversions do not. You can convert regardless of what you earn, which is why the conversion route is sometimes called the backdoor into a Roth for high earners. There’s also no annual dollar ceiling. A $10,000 conversion and a $1,000,000 conversion are both allowed. The real constraint is the tax bill, because every pre-tax dollar you convert lands on your return as ordinary income for that year.
Check for Surrender Charges First
Before you move anything, look at your annuity contract for a surrender charge. Carriers typically impose these fees if you withdraw funds within a set window after each premium payment, often six to ten years.2Investor.gov. Surrender Charge A common schedule starts near 7% in year one and steps down by about one percentage point a year until it hits zero.
Many contracts let you take out up to 10% of the account value each year without triggering the fee. If you’re still inside the surrender window, one option is to convert only the penalty-free slice each year until the charges expire. Anything the carrier keeps as a surrender charge never reaches your Roth IRA, so the cost belongs in your decision.
How the Conversion Actually Happens
Once you’ve confirmed the annuity qualifies, you’ll gather paperwork from both sides: the insurance carrier holding the annuity and the custodian that will hold your new Roth IRA. You need the annuity contract number, the current surrender value, and your cost basis. The Roth IRA custodian provides an account-opening form to receive the funds.
Direct Rollover vs. Indirect Rollover
The paperwork asks you to pick one of two methods. A direct rollover, sometimes called a trustee-to-trustee transfer, sends the money straight from the insurance company to the Roth IRA custodian. The check is made payable to the new custodian for your benefit, so the money never passes through your hands and nothing is withheld from the transferred amount.3Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
An indirect rollover sends the funds to you first. You then have exactly 60 days from the date you receive the money to deposit the full amount into the Roth IRA.3Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions Miss that deadline and the IRS treats the entire amount as a taxable distribution rather than a conversion, and if you’re under 59½ an early withdrawal penalty can stack on top of the income tax.
The Withholding Trap
An indirect rollover from a qualified plan such as a 401(k) generally forces the plan administrator to withhold 20% for federal taxes before cutting your check. To complete the full conversion, you have to replace that withheld amount from your own funds within the 60-day window. Anything you don’t replace is treated as a taxable distribution, not a conversion.
Even with a direct rollover, some people are tempted to pull a chunk out separately to cover the conversion tax bill. That side withdrawal counts as its own distribution. If you’re under 59½, it can trigger the 10% early withdrawal penalty on the amount used to pay taxes.4Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Paying the tax bill from a separate bank account avoids the problem.
Fair Market Value vs. Cash Surrender Value
How your carrier structures the move affects the taxable amount. If you fully surrender the annuity for its cash value and reinvest the proceeds into a Roth IRA, extinguishing all benefits and features of the contract, the cash you receive is what gets reported.5eCFR. 26 CFR 1.408A-4 – Converting Amounts to Roth IRAs
If instead the annuity contract itself moves into the Roth IRA without being surrendered, the taxable amount is the contract’s fair market value on the date of conversion, not its cash surrender value.5eCFR. 26 CFR 1.408A-4 – Converting Amounts to Roth IRAs Fair market value can run higher than surrender value because it accounts for guaranteed benefits and features that the surrender figure ignores. Ask your carrier which method applies before you sign anything.
What the Tax Bill Looks Like
Converting a qualified annuity creates immediate income tax. The pre-tax contributions and earnings you convert get added to your ordinary income for the conversion year.1Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs For 2026, federal income tax rates run from 10% to 37% depending on your total taxable income and filing status.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A large one-year conversion can push you into a higher bracket, which is why many people split conversions across multiple tax years.
The conversion itself does not trigger the 10% early withdrawal penalty, even under 59½. The IRS treats a properly completed rollover, whether direct or within the 60-day window, as exempt from that penalty.4Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions You still owe ordinary income tax on what you convert; no separate penalty applies to the rollover.
The Pro-Rata Rule
If you have other traditional IRA accounts that mix pre-tax and after-tax dollars, the pro-rata rule complicates the math. The IRS treats all of your traditional IRA balances as one pool when working out how much of any distribution or conversion is taxable.7Internal Revenue Service. Rollovers of After-Tax Contributions in Retirement Plans You can’t cherry-pick the after-tax dollars and leave the pre-tax money behind. The taxable and tax-free portions are calculated proportionally across every traditional IRA you own.
For example, if your combined traditional IRA balances total $100,000 and $20,000 of that is after-tax contributions, then 80% of any conversion is taxable, no matter which specific account the money leaves from. If none of your traditional IRAs holds after-tax money, the pro-rata rule doesn’t apply and the entire converted amount is ordinary income.
Take Your RMD Before You Convert
If you’ve reached the age when required minimum distributions apply, currently 73, you have to take the full RMD for the year before converting any additional funds to a Roth IRA.8Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs) RMD amounts are never eligible for rollover into any account, Roth included.9Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
In practice, the first dollars out of your traditional IRA or plan each year satisfy the RMD. Only after that obligation is met can additional funds be converted. Both amounts are taxable, so the combined hit in one year can be significant. Sizing the conversion around the RMD helps you avoid jumping brackets.
The Five-Year Rule on Converted Funds
Each Roth conversion starts its own five-year holding period, beginning on January 1 of the year you convert. If you’re under 59½ and pull the converted amount out before that five years is up, the taxable portion of the conversion faces a 10% early withdrawal penalty.1Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs The rule exists so a conversion can’t be used as a shortcut around the early withdrawal penalty on retirement plan funds.
After 59½, the five-year penalty on converted principal no longer applies. A separate five-year clock governs whether Roth IRA earnings come out completely tax-free as qualified distributions. That clock starts with your very first Roth IRA contribution or conversion, whichever came first, and only has to be satisfied once.1Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
Forms You’ll File
The institution that distributed the annuity funds must issue Form 1099-R, which reports the gross distribution and the taxable portion to the IRS.10Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc. You should receive it by early February of the year after the conversion. Check that the distribution code reflects a Roth conversion rather than a standard withdrawal.
You also file Form 8606 with your federal return for the conversion year. That form tracks the taxable and nontaxable portions of the conversion and is how the IRS verifies your cost basis in the Roth IRA going forward. Failing to file Form 8606 carries a $50 penalty per occurrence.11Office of the Law Revision Counsel. 26 USC 6693 – Failure to Provide Reports on Certain Tax-Favored Accounts or Annuities Keep copies of both forms along with confirmation statements from the annuity carrier and the Roth IRA custodian; those records fix the date and amount if the IRS ever asks.