Can Bonus Annuities Amplify Tax Efficiency in Roth Conversions?

Now more than ever, Roth conversions deserve to be a cornerstone of tax-efficient retirement planning. With everything happening in Washington, converting assets from taxable to tax-free accounts at today’s lower rates can dramatically improve long-term outcomes and reduce lifetime taxes.

But even the best-designed Roth conversion strategy can leave opportunity on the table. 

Many times we’re focused on minimizing taxes, but our clients are focused on recovering the cost of paying them. I’m sure you’ve had a client say, “I’d love to convert, but I just can't stomach paying those taxes.”

That’s where bonus annuities come in.

Leverage the Strategy?

When used strategically, bonus annuities turn the “tax pain” moment of paying taxes today into a more complete story - one that, for the right client, combines tax-efficient Roth conversions with protection, guaranteed accumulation, and long-term growth.

The built-in premium bonus can help recover a portion of the tax drag in the first year, while also offering the safe money strategy advisors and their clients enjoy from annuities. 

I’ve seen how powerful this can be for the right client through Stonewood’s Roth Done Right software. When a client analysis is run, the annuity’s upfront bonus helps them start stronger and protects against early market volatility, often producing greater total wealth over time - even after the conversion tax.  

The analysis can show that paying taxes today is not a penalty, but a better repositioning of wealth within a tax-efficient retirement income plan.

Of course, some advisors struggle with whether a bonus annuity is "too good to be true." 

After all, if the carrier is willing to pay an up-front bonus, there probably is a concession elsewhere in the product. So it is important to consider the potential lower credited rate, higher fees, and surrender periods carefully when compared to an annuity without an upfront bonus.  

One of my favorite things about the Roth Done Right software is that it allows advisors to compare the two approaches - and see in real dollars and sense which one makes sense for a given client. (Want to see it for yourself? I’m happy to send you a sample comparison - just request one here.)

Offsetting the Tax Impact Clients Feel Most

Every Roth conversion triggers a tax bill, and for high-income clients, it can also mean higher tax brackets and IRMAA surcharges. By integrating a bonus annuity, advisors can show clients how premium bonuses and guaranteed accumulation help offset those short-term taxes.

For example, a client converting $250,000 might incur a $50,000 to $60,000 tax bill on those converted funds, depending on the client's income and tax status. With a 20% bonus annuity, much of that cost can be recovered immediately, reducing the perceived barrier to action. Over time, total after-tax wealth, including the Roth and any remaining annuity value, can far surpass the values of staying in the IRA.

Instead of asking clients to “spend” money on taxes, advisors can show them how to strategically reinvest those dollars for future tax-free growth. The result is a planning story that makes it easy for clients to say “yes.”

From Concept to Client Conversation

If you’re leveraging bonus annuities in your clients’ Roth conversions, Stonewood’s Roth Done Right software is a must-have. You can quantify lifetime tax savings, IRMAA exposure, and total wealth generated through conversions, plus model premium bonuses, average credited rates, and guarantees side by side - showing break-even timelines and crossover points versus keeping the money in the IRA. 

Our goal is always to help the client understand not just the math, but the why behind the strategy - confident that they’re making a smart, tax-efficient decision for retirement.

If you’re curious to see how it works, schedule a quick call here.