How Fixed Indexed Annuities Can Help Advisors Address Taxes, Risk, and Client Behavior
For many retirement advisors, Roth conversions have become a central planning conversation. The logic is straightforward: if clients believe their tax rates may be higher in the future — or if they want to reduce the long-term tax burden on a surviving spouse or next-generation beneficiaries — it can make sense to move some retirement assets from tax-deferred accounts to tax-free Roth accounts today.
But while the tax strategy gets most of the attention, there is a second question advisors need to help their clients answer:
Once the money is converted, where should those Roth dollars live?
A Roth IRA is simply an account type. It determines how the money is taxed. It does not determine how the money is invested, how much risk the client takes, or how those assets will behave during retirement income years.
That is where annuities, especially Fixed Indexed Annuities, may play a meaningful role.
For the right client, annuities can fit seamlessly into the Roth conversion process and may help clients manage downside risk.
The Rise of “Roth-Friendly” Annuities
Insurance carriers have made significant progress in adapting their annuity platforms to support Roth conversions.
Historically, annuities were often viewed primarily through the lens of tax deferral. Because nonqualified annuities already provide tax-deferred growth, and because many annuities were held inside Traditional IRAs, the focus was usually on tax-deferred accumulation with upside potential and downside protection. Advisors would use those accumulated assets to build a retirement income plan, many times with the use of a guaranteed income rider.
Today, however, many carriers have built more capable Roth IRA administrative capabilities. Many carriers can now help process a Roth conversion and have the administrative capabilities to hold Roth assets. Others allow advisors and clients to hold both Traditional IRA and Roth IRA dollars within the same account number, leading to partial Roth conversion capabilities.
In some cases, carriers may also allow clients to take distributions from the annuity, within the liquidity restrictions, to help pay the taxes generated by the conversion.
For advisors, this development has meant that the annuity product matters, but so does the carrier’s Roth administration.
Before recommending an annuity as part of a Roth conversion strategy, advisors should understand:
- Whether the carrier can accept and administer Roth IRA dollars.
- Whether the carrier supports partial Roth conversions.
- Whether Traditional IRA and Roth IRA values can be tracked separately within the same contract (and contract/account number).
- Whether conversion taxes can be paid from the annuity, if needed.
- Whether the process creates any surrender charge, liquidity, or tax-reporting complications.
A product may look attractive on paper, but if the carrier cannot administer the Roth conversion efficiently, the strategy may become difficult to execute.
Fixed Indexed Annuities as a Safe Money Alternative
One of the longstanding appeals of Fixed Indexed Annuities, or FIAs, is the concept of indexing.
Indexing is an interest-crediting method that allows the annuity owner to participate in a portion of the upside of an external market index, such as the S&P 500®, while also providing downside protection through a stated floor. That floor is often 0%, meaning the account is protected from negative index returns in a crediting period.
For clients approaching or entering retirement, the goal is often no longer simply maximizing return. It is creating a more reliable retirement outcome. A 25-year-old investor may be able to tolerate a major market decline and wait years for recovery. A 65-year-old retiree drawing income from the portfolio often does not have that same flexibility.
The “Power of Indexing”
[Chart placeholder: indexing performance illustration to be inserted by design team]
As you can see from this chart, indexing smooths the ride.
It will not capture every great market year. But it may eliminate the most damaging negative years within the annuity’s crediting structure. For clients who want growth potential but are uncomfortable with full market exposure, that combination can be compelling.
Why Annuities Matter Inside a Roth IRA
The Roth conversion decision is usually framed as a tax decision:
“Should I pay taxes today to create tax-free income and tax-free legacy value in the future?”
That is the right starting point. But once the conversion occurs, the advisor and client still need to decide how the Roth assets should be positioned.
For many clients, Roth assets are among the most valuable dollars they own. They may be used later in retirement, preserved for a surviving spouse, or passed to children or grandchildren. Because qualified Roth IRA distributions can be tax-free, the compounding inside the Roth can be especially powerful.
That creates an important question for clients to consider:
Should those tax-free dollars be exposed to full market volatility, or should some portion be protected?
A Fixed Indexed Annuity inside a Roth IRA may offer a useful combination:
- Tax-free growth potential, assuming Roth IRA rules are satisfied
- Downside protection through the annuity’s floor
- Upside potential through indexed crediting
- Potential future income features, depending on the contract
In other words, the Roth IRA determines the tax treatment. The annuity determines the risk and crediting structure.
When paired thoughtfully, the two can work together.
Sequence of Returns Risk
This is another area where annuities can potentially add value to some Roth conversion strategies. Sequence of returns risk is the risk that a client experiences poor market returns early in retirement while simultaneously taking withdrawals from the portfolio.
The problem is not just the negative return. The problem is that the client may be forced to sell assets at depressed values to meet income needs. Those dollars are then no longer invested when the market eventually recovers.
This can permanently impair the portfolio.
Annuities with a downside floor can help address this risk. If the annuity’s crediting floor is 0%, the client is not forced to realize a market loss within that portion of the portfolio during a negative index period.
For Roth conversion planning, that stability can be valuable. A client who pays taxes today to create tax-free dollars may not want those dollars immediately exposed to a major market downturn. A protected Roth destination can make the conversion feel more comfortable and potentially more durable.
Can a Bonus Annuity Help Offset the Cost of Conversion?
One common question from both clients and advisors is: “Should we consider a bonus annuity to help cover the taxes and IRMAA surcharges created by the Roth conversion?”
The answer is: Maybe.
Bonus annuities can be appealing because they provide an upfront increase to certain contract values. Some contracts credit the bonus directly to the account value. Others credit the bonus only to a value used to calculate guaranteed income or death benefits.
For purposes of this discussion, we are focusing on annuities where the bonus is credited directly to the account value, creating an immediate increase in the annuity’s starting value.
The appeal is obvious. If a Roth conversion creates a tax bill equal to roughly 20% of the converted amount and the annuity offers a 20% bonus, the client may think:
“Why not use the bonus to offset the tax cost?”
At first glance, it sounds like a no-brainer.
But there is a catch.
As Stonewood Founder and resident actuary Martin Ruby likes to say, “There are only 100 pennies in a dollar.”
If the insurance carrier allocates more of those pennies to an upfront bonus, it generally has fewer pennies available for other contract features. That may mean lower caps, lower participation rates, longer surrender periods, lower liquidity, or less attractive long-term crediting potential.
So the real question is not simply whether the bonus helps today. It’s: Does the value of the upfront bonus outweigh the potential tradeoffs over time?
The Math: Comparing Roth Conversion Scenarios
To evaluate this question, we modeled several scenarios using Stonewood’s Roth Done Right software.
Keep in mind, this analysis is hypothetical and for illustrative purposes only. If you’d like to see how Roth Done Right can help analyze your client’s Roth conversions, you can request a sample report run on a client of your choice here → https://www.stonewoodfinancial.com/software/roth-done-right/.
The hypothetical analysis compares the after-tax values of multiple strategies on a year-by-year basis for a 60-year-old couple.
Client Profile
60-Year-Old Couple | $2M IRA | $500k Conversion Amount | 20% Current Effective Tax Rate | Withdrawals taxed at IRA Owner’s Tax Rate | Legacy money taxed at Heirs Tax Rate (30% Higher)
The purpose of the analysis is not to declare one universal winner. The purpose is to show how different Roth conversion destinations can materially change the outcome.
We compared the following scenarios:
Scenario 1: Stay in the Traditional IRA
The client keeps the money in a Traditional IRA invested in a blended portfolio. The analysis uses historical performance since the turn of the century.
This represents the “do nothing” strategy.
Scenario 2: Convert to Roth, Stay in the Managed Portfolio
The client converts the assets to a Roth IRA and keeps the money invested in the same blended portfolio. Taxes and projected IRMAA surcharges are shown as withdrawals from the account to create a like-to-like comparison.
Scenario 3: Convert to Roth, Use a Non-Bonus FIA
The client moves assets to a non-bonus Fixed Indexed Annuity with a 9.25% cap, then converts the assets to Roth within the annuity. Taxes and projected IRMAA surcharges are again shown as withdrawals from the account.
Scenario 4: Convert to Roth, Use a Bonus FIA
The client moves Roth assets to a bonus annuity with a 13% upfront bonus and a 6% cap. Taxes and projected IRMAA surcharges are shown as withdrawals from the account.
Key Takeaways from the Analysis
Takeaway 1: The Roth Conversion Break-Even Point Arrives Before Life Expectancy
In the IRA versus Roth managed portfolio comparison, the client breaks even with the Roth strategy in year seven.
For a 60-year-old couple, that is well before normal life expectancy. This suggests the client should strongly consider a Roth conversion, assuming the model inputs reflect their actual planning situation and objectives.
The key point for advisors is this: a Roth conversion should not be evaluated only by the immediate tax cost. It should be evaluated by the long-term after-tax outcome.
Clients often feel the pain of the tax bill immediately. They may not feel the future tax savings with the same emotional intensity. That is why year-by-year modeling can be so helpful. It allows the client to see when the strategy begins to pay off.
Takeaway 2: The FIA Strategy Can Improve the Conversion Math
In the IRA versus Roth FIA comparison, the client breaks even immediately in the model.
Why? In this case, the indexed annuity with a 9.25% cap outperformed the modeled 50/50 portfolio net of fees. That additional modeled performance helped offset the tax and IRMAA costs associated with the conversion.
For advisors, this creates an important planning insight: the destination asset can affect the Roth conversion break-even point.
Takeaway 3: The Bonus Annuity Can Be an Objection Killer
In the modeled bonus annuity scenario, the client not only breaks even from day one but does so emphatically. The bonus annuity produces the highest account values early in the Roth conversion process.
That is not surprising. The upfront bonus creates an immediate increase in account value, which can help psychologically and mathematically offset the tax cost of conversion.
Even with a lower cap and lower projected growth rate, the bonus annuity remains ahead of the “do nothing” Traditional IRA strategy throughout the comparison. In this case, the combination of the upfront bonus and the Roth’s insulation from future projected tax and IRMAA increases produces a favorable result.
This does not mean every client should use a bonus annuity.
It means that for some clients, the bonus can help overcome the largest obstacle to action:
“I do not want to pay the taxes today.”
If the bonus helps the client move forward with a strategy that is otherwise in their long-term best interest, it may serve a valuable role.
To Bonus or Not to Bonus?
Once the analysis shows that the client should consider a Roth conversion, the next question becomes:
Should the annuity destination be a bonus FIA or a non-bonus FIA?
The answer depends on the client’s priorities.
When a Non-Bonus FIA May Be Preferable
If the client is long-term focused and does not need the bonus to feel comfortable with the conversion, the non-bonus FIA may be the better destination asset.
In the modeled comparison, the non-bonus FIA offers a higher cap than the bonus annuity. Over a longer time horizon, that additional upside potential may be more valuable than the upfront bonus.
For clients who can pay conversion taxes from outside assets, understand the long-term benefit of the Roth conversion, and are comfortable with the initial tax cost, the non-bonus FIA may offer the cleaner long-term strategy.
Put simply: if the client does not need the bonus, they may be better off not paying for it through reduced long-term upside.
When a Bonus FIA May Be Useful
If the client views the upfront tax cost as the primary barrier to conversion, a bonus annuity may be worth considering.
In that case, the bonus functions less as a pure performance enhancer and more as a behavioral tool. It helps the client get past the emotional resistance of paying taxes today.
That can be powerful.
The mathematically optimal strategy is only useful if the client is willing to implement it. If the bonus annuity helps the client move forward with a Roth conversion that improves their long-term after-tax outcome, it may have a legitimate planning role.
For some clients, the choice may not be: “Bonus annuity versus non-bonus annuity.”
It may be: “Bonus annuity Roth conversion versus no Roth conversion at all.”
That is a very different comparison.
A Practical Recommendation: Revisit the Strategy After the Surrender Period
For clients who use a bonus annuity as part of a Roth conversion strategy, advisors should consider scheduling a future review once surrender charges expire.
At that point, the client may be able to evaluate whether the current annuity remains the best fit or whether it makes sense to reposition the assets into a new contract with more attractive long-term crediting potential.
This can allow the client to benefit from the upfront bonus when it matters most — at the time of conversion — while later reassessing whether they are giving up too much growth potential after the surrender period ends.
This is not a recommendation to replace annuities routinely. Any replacement analysis must consider surrender charges, new surrender periods, product features, client objectives, liquidity needs, tax considerations, and compliance requirements.
But it is a reminder that annuity planning should not be static.
The right product for solving today’s objection may not always be the right product for maximizing tomorrow’s opportunity.
Advisor Planning Questions
Before using an annuity in the Roth conversion process, advisors should ask the following:
- Is the client a good Roth conversion candidate? Consider current tax rates, projected future tax rates, beneficiary tax exposure, RMDs, IRMAA, Social Security taxation, estate goals, and income needs.
- Does the carrier support Roth administration? Confirm whether the carrier can process Roth money, support internal conversions, track Traditional and Roth values separately, and issue proper tax reporting.
- What role is the annuity playing? Is it being used for principal protection, income planning, fixed income replacement, behavioral support, legacy planning, or some combination?
- Is the client giving up too much upside for the bonus? Compare bonus and non-bonus products carefully. A higher upfront value may come with lower caps, lower participation rates, longer surrender schedules, or reduced long-term growth potential.
- What is the client’s time horizon? Bonus annuities may look especially attractive early. Non-bonus annuities may be more attractive over longer periods if they offer better crediting potential.
- What happens after the surrender period? Build in a future review to determine whether the contract still serves the client’s objectives.
Key Takeaway: Annuities Can Help Solve More Than One Roth Conversion Challenge
Roth conversions are often discussed as tax strategies. But successful Roth conversion planning requires more than tax math.
It requires a destination for the converted dollars. It requires a risk management plan. It requires a strategy for helping clients emotionally accept the cost of paying taxes today. And it requires an advisor who can model the tradeoffs clearly.
Fixed Indexed Annuities can play a valuable role in that process.
They may provide a safe money alternative for converted Roth dollars. They may help reduce sequence of returns risk. They may offer a fixed income alternative for clients who want principal protection with some upside potential. And, in certain cases, bonus annuities may help offset the psychological and financial burden of the conversion tax bill.
But the details matter.
Not every carrier is equally Roth-friendly. Not every annuity is appropriate. Not every bonus is worth the tradeoff. And not every client needs the same solution.
The advisor’s role is to bring clarity to the decision.
When modeled properly, annuities may help clients see Roth conversions not simply as a tax bill, but as a long-term repositioning strategy: moving retirement assets from tax-deferred uncertainty to tax-free opportunity, with a risk profile designed for the retirement years ahead.
Addressing the Objection: “Isn’t This Just an Annuity Sales Pitch?”
Some advisors hesitate to bring an FIA into the Roth conversion conversation because they worry it will look like they are using a tax strategy to justify an annuity sale. That concern is not unreasonable. Some marketing in this space leans hard on bonus percentages without walking through what the client gives up for that bonus, and a few vocal critics in the annuity industry have pushed back publicly on Roth-conversion-plus-bonus-annuity pitches that skip that tradeoff.
The honest answer is that the concern is fair, and the way to address it is not to avoid the conversation. It is to model it.
The scenario comparison earlier in this piece is built for exactly that purpose. Comparing the traditional IRA, the Roth in a managed portfolio, the Roth in a non-bonus FIA, and the Roth in a bonus FIA side by side gives the client an apples-to-apples, after-tax view instead of a single product recommendation dressed up as a tax strategy. When a client can see the year-by-year numbers for each path, if the annuity earns its place in the plan, it does so on the math, not on the pitch.
How Stonewood Supports This Strategy
Stonewood has created two client analysis tools to help advisors structure, present and execute Roth strategies leveraging annuities.
Roth Done Right: Model the Conversion Itself
Stonewood created its Roth Done Right software to help advisors analyze the best Roth conversion structures for each individual client – from maximizing taxes and IRMAA saved to spacing the conversion to speed up break-even to incorporating life and annuity products where appropriate and more.
Your client’s analysis can be run in under 60 seconds – no tax return needed.
See how Roth Done Right models a conversion → stonewoodfinancial.com/software/roth-done-right
Annuity Alpha: Model the Destination
Once the conversion itself makes sense, Annuity Alpha helps advisors show where the converted dollars should live. It lays out a side-by-side comparison of a Fixed Indexed Annuity’s guaranteed income, subject to the claims-paying ability of the issuer, against a brokerage account alternative, so a client can see the FIA-versus-managed-portfolio tradeoff in the same kind of client-facing format.
See how Annuity Alpha compares an FIA to a brokerage alternative → pages.stonewoodfinancial.com/annuityalpha
Used together, the two tools cover both halves of the decision an advisor and client need to make: whether to convert, and where the converted dollars should live once the tax bill is paid.
Frequently Asked Questions
What is a fixed indexed annuity?
A fixed indexed annuity, or FIA, is an insurance contract that credits interest based in part on the performance of a market index, such as the S&P 500®, while protecting the contract from negative index returns through a stated floor, often 0%. The client is not directly invested in the index and gives up some upside potential in exchange for that downside protection.
How do Roth conversions work with fixed indexed annuities?
A converted Roth dollar does not need to be converted into an FIA. It can be moved to an FIA. Once the Roth conversion is completed, the assets can be put inside the FIA to pursue indexed growth with principal protection, which some advisors use to assist with managing sequence of returns risk on tax-free dollars.
Are bonus annuities a good way to pay for Roth conversion taxes?
It depends on the client and contract. A bonus can reduce some of the upfront tax cost, but bonus contracts tend to have lower caps, longer surrender periods, and less long-term crediting potential than non-bonus contracts. Instead of assuming the bonus is automatically the better outcome, the more reliable approach is to model both paths side by side.
Can I transfer an annuity to a Roth IRA without rolling it over to a new contract?
Some carriers permit this with an in-contract conversion where traditional and Roth dollars are tracked separately within the same contract number. Other carriers will require a trustee-to-trustee transfer to a new Roth contract, which can trigger a new surrender period. It depends on the carrier, so it’s important to confirm the mechanics in advance.
Is using an annuity for a Roth conversion just a sales trick?
It can be, if the recommendation is based on a bonus percentage without showing the client what that bonus costs in caps or surrender terms. The most transparent way to assess whether an FIA should be included in a client’s Roth conversion strategy is to do a year-by-year comparison of the available destination options on a carrier-neutral basis.
Sources and References (Additional)
Regulatory descriptions of indexed annuity risk, floor, and cap mechanics referenced in this piece are consistent with:
- “The Complicated Risks and Rewards of Indexed Annuities,” FINRA Investor Insights, Financial Industry Regulatory Authority. Available online: finra.org
- “Indexed Annuities,” Investor.gov, U.S. Securities and Exchange Commission. Available online: investor.gov
Important Disclosures
This material is for informational and educational purposes only and should not be construed as tax, legal, investment, or insurance advice. Clients should consult with their qualified tax, legal, and financial professionals before implementing any Roth conversion or annuity strategy.
Roth conversions are taxable events and may increase taxable income, impact Medicare IRMAA surcharges, affect taxation of Social Security benefits, and influence other income-based planning considerations.
Fixed Indexed Annuities are insurance products. They are not direct investments in the stock market or any index. Index performance does not include dividends unless specifically stated by the contract. Product features, caps, participation rates, spreads, surrender charges, bonuses, income riders, and guarantees vary by carrier and contract.
Annuity guarantees are backed by the claims-paying ability of the issuing insurance company. Bonus annuities may include lower caps, lower participation rates, longer surrender periods, reduced liquidity, or other limitations compared with non-bonus products.
Any annuity replacement or exchange should be carefully evaluated based on the client’s objectives, liquidity needs, surrender charges, product benefits, tax implications, and applicable regulatory requirements.
© 2026 Stonewood Financial
