You can transfer an annuity to a Roth IRA only if it is a qualified annuity held inside an employer retirement plan such as a 401(k), 403(b), or governmental 457(b). The rollover is allowed, but the full pre-tax balance lands on your tax return as ordinary income for the year of the conversion. A non-qualified annuity purchased outside a retirement plan with after-tax dollars cannot be rolled into a Roth IRA under federal law.1Cornell Law School Legal Information Institute. 26 USC 402(c)(8)(B) – Eligible Retirement Plan Definition
Which Annuities Qualify and Which Don’t
The source of the money inside the contract decides everything. A qualified annuity was funded with pre-tax dollars through an employer plan, so federal law treats a distribution from it the same way it treats a distribution from any other eligible retirement plan: you can roll it into a Roth IRA as long as you include the converted amount in taxable income.2Internal Revenue Service. Rollover Chart
A non-qualified annuity was bought directly from an insurance company with money that was already taxed. It never lived inside a retirement plan, so it does not appear in the statutory list of “eligible retirement plans” that can feed a Roth IRA.1Cornell Law School Legal Information Institute. 26 USC 402(c)(8)(B) – Eligible Retirement Plan Definition A 1035 tax-free exchange does not close this gap either, because that exchange only works between insurance contracts and a Roth IRA is not one.
If your annuity is non-qualified, the only route into a Roth is to surrender the contract, pay ordinary income tax on the earnings, and then make regular annual Roth contributions within the normal limits. For 2026 that limit is $7,500, or $8,600 if you are 50 or older, and the usual Roth income limits still apply to direct contributions.3Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500
One important point for high earners with a qualified annuity: income limits do not apply to conversions. The IRS allows anyone, at any income level, to convert or roll qualified retirement money into a Roth IRA.4Internal Revenue Service. Topic No. 309, Roth IRA Contributions
The Tax Bill You’ll Owe
Every pre-tax dollar and every dollar of accumulated earnings moving from a qualified annuity into a Roth IRA counts as ordinary income in the year of the conversion. It stacks on top of your wages, investment income, and everything else, which can push you into a higher federal bracket. For 2026, the top marginal rate of 37% starts at taxable income above $640,600 for single filers and $768,700 for joint filers.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Pay the tax from money outside the annuity and outside the new Roth IRA whenever possible. Pulling funds from either shrinks the balance that grows tax-free from here forward. And if you are under 59½ and use annuity money to cover the tax, that withdrawal itself can trigger a 10% early distribution penalty on top of the regular income tax.6Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Because a direct rollover carries no automatic withholding, the IRS expects you to cover the extra tax yourself. If you would owe at least $1,000 after withholding and credits, and your withholding falls short of 90% of the current year’s tax or 100% of last year’s (110% if last year’s AGI exceeded $150,000), you generally need to make quarterly estimated payments to avoid an underpayment penalty.7Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc. A simpler fix if you have wages: raise your federal withholding for the rest of the year. Withholding counts as paid evenly across the year, so a late-year bump can satisfy the safe harbor without extra forms.
Direct Rollover vs. Indirect Rollover
A direct rollover, also called a trustee-to-trustee transfer, sends the money straight from the insurance carrier or plan administrator to the Roth IRA custodian. Nothing is withheld, and the funds never pass through your hands.8Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions This is the method to use.
An indirect rollover pays the distribution to you first. The plan must withhold 20% of the taxable amount for federal taxes at that moment.9Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules You then have 60 days to deposit the full original balance into a Roth IRA. To move the whole balance over, you have to make up that withheld 20% from other savings; you get the amount back as a credit when you file, but the cash-flow hit is real. Miss the 60 days and any shortfall is simply out of the tax-advantaged world for good. The IRS can waive the deadline in narrow circumstances, generally involving institutional errors or events beyond your control, through self-certification or a private letter ruling.10Internal Revenue Service. Retirement Plans FAQs Relating to Waivers of the 60-Day Rollover Requirement All of this disappears with a direct rollover.
When you fill out the carrier’s distribution form, make sure “direct rollover” is clearly designated. If the paperwork is ambiguous, the carrier will default to treating the transfer as a payment to you and withhold 20%.
Surrender Charges and Lost Contract Benefits
Most annuity contracts charge a surrender fee if you withdraw funds before a set holding period is up. These fees commonly start between 7% and 10% of contract value and drop by roughly a percentage point each year, with surrender periods running anywhere from three to fifteen years. Many contracts let you withdraw up to 10% each year without penalty, which is why some people spread a conversion across several years.
Surrendering the contract also ends any riders attached to it. Guaranteed minimum death benefits, lifetime income riders, and stepped-up benefit provisions all disappear when the annuity is liquidated, and any additional premium you paid for those features is gone. Weigh the projected value of those guarantees against the long-term tax advantages of a Roth before you commit, especially if you are close to the age when income guarantees would begin paying out.
Two Five-Year Clocks You Need to Know About
The conversion itself is not hit with the 10% early distribution penalty.11Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs But if you later pull the converted money out of the Roth IRA before you turn 59½ and before satisfying a five-year holding period, the IRS can apply that 10% penalty to the taxable portion of the conversion.12Internal Revenue Service. Publication 590-B (2025), Distributions From Individual Retirement Arrangements (IRAs)
Every conversion starts its own five-year clock on January 1 of the year it happens. A 2026 conversion at any point in the year runs through December 31, 2030. Convert again in a later year and that batch has its own clock. People routinely assume the first conversion covers all later ones. It does not.
Once you reach 59½ the 10% penalty on converted amounts goes away regardless of the holding period. Tax-free withdrawal of earnings, however, requires satisfying a separate five-year rule that runs from your first Roth IRA contribution or conversion.12Internal Revenue Service. Publication 590-B (2025), Distributions From Individual Retirement Arrangements (IRAs) The two clocks run independently, which is why timing matters if there is any chance you will need the money soon.
RMDs Have to Come Out First
If you have reached the age when required minimum distributions apply, you must take the full RMD for the year before you convert anything else. The IRS prohibits rolling RMD amounts into a Roth IRA, and treating one as a conversion creates an excess contribution subject to a 6% penalty for each year it remains in the account.8Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
The RMD is taxable on its own, and any conversion on top of it adds more taxable income in the same year. Plan the sequence and the size together, not separately.
Medicare Premiums and the Investment Income Tax
Retirees on Medicare have an extra cost to watch. The Income-Related Monthly Adjustment Amount, known as IRMAA, raises Part B and Part D premiums based on modified adjusted gross income from two years earlier. For 2026, surcharges kick in above $109,000 for individual filers and $218,000 for joint filers.13Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles A large conversion in 2026 shows up in your 2028 Medicare bill. A $200,000 conversion stacked on ordinary retirement income can add hundreds of dollars a month to premiums for that year. The surcharge lasts one year, but the money still leaves your pocket.
Spreading conversions across multiple years keeps annual income under the surcharge triggers. Finishing conversions at least three years before Medicare enrollment avoids the lookback entirely.
The 3.8% net investment income tax is a related concern. The conversion is not itself net investment income, but it raises your MAGI. If that higher MAGI clears the threshold ($250,000 joint, $200,000 single), your dividends, interest, and capital gains for the year can become subject to the 3.8% surtax.14Internal Revenue Service. Topic No. 559, Net Investment Income Tax
Reporting the Conversion
The carrier or plan administrator issues Form 1099-R showing the distribution.15Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc. The Roth IRA custodian files Form 5498 reporting what came in.16Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025) On your own return, Form 8606 tracks the taxable portion and your basis going forward, and the taxable amount flows to Form 1040.17Internal Revenue Service. About Form 8606, Nondeductible IRAs When the annuity was entirely pre-tax money and earnings, as most qualified annuities are, the full converted amount shows up as taxable.18Internal Revenue Service. Instructions for Form 8606 (2025) Keep the 1099-R and 5498 with your records after filing in case the IRS follows up.