Bonus Annuity to Pay Roth Conversion Tax? Why It Fails

“Convert to a Roth with no out-of-pocket cost.” If you haven't seen that ad yet, Roccy DeFrancesco says you will. The pitch: buy an annuity with a 20% bonus and use the bonus to pay the tax on your Roth IRA conversion. Roccy believes it's a financial loser basically every time, and in this episode he walks through the math. Why everyone is talking about Roth conversions: there's roughly $40 trillion sitting in tax-deferred accounts — IRAs, 401(k)s and government plans — and advisors want to manage it. Roccy has no problem with advisors using Roth conversions to introduce themselves, as long as they run accurate numbers. His problem is with concepts he considers fundamentally flawed, and the bonus annuity is one of them. Fixed indexed annuities, the basics: No downside risk: market losses can't reduce your balance, and gains lock in every year. Tax deferral outside an IRA or 401(k), and some come with a guaranteed income-for-life rider. The trade-off is a cap on growth. A good non-bonus product might cap at 8% to 10%; Roccy says bonus products can cap as low as 4% or 5%. He thinks these products are designed to return 4% to 6%. How a bonus annuity works: put in $100,000 and the carrier adds, say, $20,000 up front, so you start at $120,000. But the bonus usually doesn't fully vest until the end of the surrender period (often 10 years), so you're effectively locked in. And most non-guaranteed caps can change every year. Roccy says the two main carriers used for this Roth conversion pitch both have a documented history of dropping caps. When Roccy thinks a bonus annuity can make sense: You're stuck with a carrier that keeps cutting your cap, and a bonus from a carrier that doesn't cut caps offsets your surrender charge. You want guaranteed lifetime income soon (you're 65, 68, 70) and the bonus boosts the income calculation. The sales pitch: “How would you like me to find you the money to pay the taxes on your Roth conversion?” Roccy walks through three social media ads built on that promise. One of them is from Roth Blueprint, which bills itself as “the Roth conversion experts” and shows Instagram's verified badge. Roccy calls the “expert” label and the badge disingenuous, since in his words a verified account says nothing about whether someone understands Roth conversions, and he says he believes the firm's numbers are inaccurate. The example: a 59-year-old with $500,000 in an IRA moves $350,000 into a 20% bonus annuity and gets a $70,000 bonus to “pay the tax.” The rest stays in the IRA, because surrender charges keep you from pulling the tax money out of the annuity. Why Roccy says the math fails (his slides, $100,000, the 10 years ending August 2026): Fixed indexed annuity with a 9% cap: averaged 7.14%, growing to $199,257, with no market losses along the way. Over the same period, he says the bond index returned less than 2%. Bonus annuity with a 5% cap, starting at $120,000: averaged 3.98%, growing to $177,295. The $20,000 bonus left you almost $22,000 behind, and that assumes the carrier never cut the cap. Keeping the money in a 60/40 portfolio: about $254,000. Fully in the S&P 500: about $354,000. Roccy's point: sold in a vacuum, a bonus sounds like free money. Compared honestly with the alternatives, he says it fails 100% of the time. Don't put the cart before the horse. Before anyone sells you a product, find out whether a Roth conversion even makes sense for you. After years of research and building software to run the numbers, Roccy's opinion is that conversions don't work about 85% of the time if the goal is to have more money while you're alive. The odds improve if the goal is leaving more to your heirs. Conversions can't be undone, so a bad recommendation can follow you and your heirs for years. He closes with a warning about self-described IRA experts, naming Craig Wear, whose Roth conversion advice he says can cost upwards of $12,000 and whose numbers he calls woefully inaccurate. Roccy covers that in detail in episode 3. His advice: interview any advisor about how they run Roth conversion numbers and what software they use. Resources mentioned: Read Deconstructing Roth IRA Conversions: Myth vs. Reality free online. Roccy wrote it with his daughter Lauren. It's also on Amazon, about $24.95 in print or $9.99 on Kindle. Download the free Top 10 Roth Conversion Mistakes guide, a shorter, lighter version of the book. Find a Certified Roth Conversion Specialist (CRCS), the certification Roccy's team created. If you're getting Roth conversion advice from anyone, he suggests making sure they hold it. Have your numbers run. Roccy says his team can run your conversion in under 10 minutes in their OnPointe software. Contact [email protected] or 269-216-9978. Disclosure: Roccy founded an insurance wholesale company that works with more than 650 agents nationwide selling fixed insurance products, including fixed indexed annuities. He says that if the bonus annuity math worked, his agents would be selling it. He also wrote the book mentioned here, runs the OnPointe software used to run conversion numbers, and his team created the CRCS certification. His firms earn money when consumers come to them for help. Every characterization of Roth Blueprint, Craig Wear, Ken Fisher and the carriers behind these products is Roccy's own opinion; none of them has responded here. Returns come from his slides, reflect particular products and a particular 10-year period, and aren't guaranteed for any product you might buy. Nothing here is legal, tax or investment advice. Questions, or a topic you want covered? Reach out.