Can You Convert an Annuity to a Roth IRA? Taxes, Steps, and Deadlines

You can convert an annuity to a Roth IRA only if the annuity is held inside a pre-tax retirement account such as a traditional IRA, 401(k), 403(b), or 457(b). The full pre-tax balance you move counts as ordinary income for the year of the conversion, there is no income limit on who can do it, and the decision is permanent once completed.

Which Annuities Actually Qualify

The tax code splits annuities into two categories, and only one can go into a Roth IRA. A qualified annuity sits inside a tax-advantaged retirement plan and was funded with pre-tax dollars. The IRS treats a rollover from any of these eligible retirement plans into a Roth IRA as a qualified rollover contribution.¹

A non-qualified annuity, bought with after-tax money from an insurance company outside any retirement plan, cannot be converted. The statute limits qualified rollover contributions to funds coming from eligible retirement plans, and a non-qualified annuity does not meet that definition. A 1035 exchange lets you swap one annuity contract for another tax-free, but it does not let you move a non-qualified annuity into any IRA. If you hold one, your only route into a Roth is the ordinary one: take the money out (paying tax on any gains) and make regular Roth contributions within the annual limit if you have earned income.

Income limits are worth clearing up because people confuse the two rules. The direct-contribution income limits do not apply to conversions. Congress removed the $100,000 cap on Roth conversions effective in 2010, and the current statute contains no income restriction on rollovers from eligible retirement plans into a Roth IRA.¹ Whether you earn $50,000 or $5 million, the conversion door is open.

What the Tax Bill Looks Like

Every dollar of pre-tax money you convert gets added to your taxable income for that calendar year, taxed at ordinary income rates. There is one break built into the rule: the 10% early withdrawal penalty that normally hits distributions before age 59½ does not apply to the conversion itself.¹ You owe income tax, not the penalty, on the amount you move.

A big conversion can push you into a higher federal bracket. For tax year 2026, the brackets for single filers are:²

10% up to $12,400
12% from $12,401 to $50,400
22% from $50,401 to $105,700
24% from $105,701 to $201,775
32% from $201,776 to $256,225
35% from $256,226 to $640,600
37% above $640,600

Someone earning $80,000 in regular income who converts a $150,000 annuity ends up with $230,000 of taxable income, partly in the 32% bracket. Only the income sitting inside each bracket is taxed at that bracket’s rate, but the marginal jump still matters when you’re sizing the conversion.

The Pro-Rata Rule

If any of your traditional, SEP, or SIMPLE IRAs contain a mix of deductible and nondeductible contributions, you cannot pick off only the after-tax dollars. The IRS looks at all those IRAs together and calculates the tax-free portion of any conversion proportionally. If your total IRA balances add up to $200,000 and $20,000 came from nondeductible contributions, 10% of the conversion is tax-free and the other 90% is taxable.

You report the calculation on Form 8606, which is required whenever you convert traditional IRA funds and have any history of nondeductible contributions.³ Hold on to records of every nondeductible contribution you have made. Without that paperwork, you can end up paying tax twice on the same money.

Costs That Get Missed

The federal income tax is the obvious hit. Three other costs show up in the same year or a couple of years later, and they catch a lot of retirees off guard.

Medicare Premium Surcharges

Medicare sets your Part B and Part D premiums using your modified adjusted gross income from two years earlier. A conversion in 2024 shows up on your 2026 premium notice. For 2026, IRMAA surcharges begin when individual income exceeds $109,000 (or $218,000 for joint filers), and the top tier kicks in above $500,000 for individuals and $750,000 for joint filers.⁴ The surcharge is per person, so a married couple can pay it twice.

Taxable Social Security

Social Security benefits are taxed based on “combined income,” which adds half your benefit to your other taxable income and any tax-exempt interest. Once combined income passes $34,000 for single filers or $44,000 for joint filers, up to 85% of the benefit becomes taxable. A conversion pumps up the taxable income side of that formula and can flip someone from having untaxed benefits to having most of them taxed.

Net Investment Income Tax

Conversion income itself is not net investment income, but it raises your MAGI, which is what triggers the 3.8% Net Investment Income Tax. NIIT applies once MAGI passes $200,000 for single filers or $250,000 for joint filers.⁵ If your conversion drags you across that line, capital gains, dividends, and other investment income you already have can pick up the extra 3.8%.

The Five-Year Clock on Converted Money

Converting does not mean you can freely withdraw. If you are under 59½ and pull converted funds out within five tax years of the conversion, a 10% penalty applies to the amount withdrawn. Each conversion runs its own five-year clock, starting January 1 of the year you made it.¹

A separate rule governs earnings: they come out completely tax-free only after any Roth IRA of yours has been open for at least five tax years and you meet a qualifying condition such as reaching age 59½.⁶ If you are already past 59½ when you convert, the per-conversion penalty rule does not apply, but the overall five-year rule still decides whether earnings are fully tax-free.

So if you are under 59½ and thinking about converting an annuity you might need to tap in a few years, that penalty can eat the benefit you were chasing.

Why People Do It Anyway

The main draw is eliminating required minimum distributions. Traditional IRAs and employer plans force you to start withdrawing at age 73, whether you want to or not.⁷ Those distributions are ordinary income and can keep you locked in a higher bracket for the rest of your life.

Roth IRAs have no required minimum distributions during the owner’s lifetime.⁷ The money keeps growing tax-free, and you decide when to take it out. For a retiree who does not need the account to cover living expenses, that flexibility is valuable, and heirs receive the account tax-free.

Spreading the Bill Across Years

You do not have to convert everything at once. The IRS allows partial conversions, so you can move a slice of a traditional IRA or qualified plan while leaving the rest alone.⁸

Converting in smaller pieces over several years lets you keep each year’s income inside a target bracket. If your other income puts you at $80,000 and you want to stay under the top of the 22% bracket ($105,700 for single filers in 2026), you might convert around $25,000 a year rather than absorbing the whole balance in one return.² Smaller conversions also help you stay under IRMAA thresholds and keep Social Security from getting pulled into taxable range.

The tradeoff is that the money left behind keeps growing tax-deferred and will eventually face RMDs and ordinary income tax. A multi-year plan tends to work best during a window of lower income, such as the years between retirement and age 73.

How to Complete the Transfer

Check for Surrender Charges First

Before you start any paperwork, look at your annuity contract for surrender charges. Many contracts charge a fee if you withdraw funds within a set period after each premium, often six to ten years, starting near 7% and declining by roughly a point a year until it reaches zero.⁹ If your surrender period is nearly up, waiting a few months can save real money. Also confirm your cost basis, which is any after-tax money you put in; the insurance company can provide it.

Pick the Right Transfer Method

A trustee-to-trustee transfer, where the insurance company sends the funds directly to your Roth IRA custodian, is the cleanest way. Nothing is withheld from the amount transferred, and you pay the income tax when you file.¹⁰

An indirect rollover, where the check comes to you first, triggers withholding. Distributions from employer plans like a 401(k) or 403(b) have mandatory 20% federal withholding. IRA distributions default to 10% withholding, which you can decline. Either way, you have 60 days to deposit the full conversion amount into the Roth. If a 401(k) withholds $20,000 out of a $100,000 distribution, you still need to deposit the full $100,000 in the Roth, coming up with that $20,000 out of pocket. Any shortfall is treated as a taxable distribution and can pick up the 10% early withdrawal penalty if you are under 59½.¹⁰

Reporting

The insurance company or plan administrator will send Form 1099-R the following January reporting the distribution. You report the conversion on your federal return, and if you have any nondeductible IRA contributions in your history, you also file Form 8606 to calculate the taxable portion.³

Deadline: December 31

Regular IRA contributions can be made up to the April filing deadline. Conversions cannot. A Roth conversion has to be completed by December 31 to count for that tax year. A transfer finalized on January 2 goes on next year’s return. If you are converting an amount sized to fill a specific bracket, the money has to actually move before year-end. Most custodians need 10 to 15 business days to process, so starting in early December leaves little room.

The Conversion Is Permanent

Before 2018, you could reverse a Roth conversion through a recharacterization. That option is gone. Any conversion made in 2018 or later stands.⁸ If the market falls 30% the week after you convert, you still owe income tax on the pre-drop value you converted. That risk is one more argument for splitting a large balance across several years rather than moving it all at once.

1
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
3
Internal Revenue Service. About Form 8606, Nondeductible IRAs
4
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
5
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
6
Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs
7
Internal Revenue Service. RMD Comparison Chart (IRAs vs. Defined Contribution Plans)
8
Internal Revenue Service. Instructions for Form 8606
9
Investor.gov. Surrender Charge
10
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions