U.S. Treasury Makes Deferred Income Annuities More Attractive

Written by Hersh Stern July 15, 2014

The benefits from owning a deferred income annuity (DIA) -- aka longevity annuity -- were significantly improved in July, 2014, when the U.S. Treasury made it easier for you to invest in a DIA using your 401k or IRA monies.

In short, the deferred income annuity has become more appealing to a wider range of current and future retirees. I cheer this Treasury Department change because I believe it will open up this powerful retirement planning tool to far more consumers on a favorable tax basis.

The new regulations cleared up questions about how to apply the required minimum distributions (RMDs) rules for an IRA annuity that is not liquid and yet not paying out any cash.

Some background: A deferred income annuity allows you to invest today and grow your account without paying taxes on the gains, with the goal of receiving a much larger income stream at some point in the future.

Because the amount you will receive in the future increases proportionally to the amount of time you let your account grow (due to the miracle of compound interest), this kind of annuity can be used to ensure a very large income deeper into your retirement, say, at age 80 or 85, for example.

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However, there was a problem if you wanted to pay for your annuity with IRA or 401k monies and delay also the start of income payments past age 70-1/2. That's when you're required to begin withdrawing RMDs from your IRA.

So if you were, say, age 60, you could buy a deferred income annuity that started at age 70 (i.e., with a 10-year deferral), but you couldn't delay the start date past age 70. So deferred income annuities were unavailable for IRA transfers if the deferral period selected by the owner extended past the beginning of his or her RMD age (70-1/2).

To resolve this conflict the Treasury just declared that as long as your longevity (deferred income) annuity meets certain requirements, it would be deemed a "Qualified Longevity Annuity Contract" (QLAC) and automatically satisfy the RMD rules even though annuity payments (i.e., distributions to you) wouldn't begin for another 15 or 20 years or longer.

In its announcement, the Treasury Department recognized the importance of deferred income annuities in retirement planning. “All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings,” J. Mark Iwry, senior advisor to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy, said in a statement.

“As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”

What this means for you

You can now use up to 25% or $125,000 – whichever is less – of a 401(k) or IRA to buy a deferred income longevity annuity. That dollar limit will be adjusted in the future for cost-of-living increases.

What’s more, when you buy a longevity annuity, you can now choose to include a “return of premium” death benefit which would return the principal in the annuity account to your heirs if you should die before monthly payouts begin.

The new rule also helps to clarify this important change. Contract purchasers can ask to include a statement that affirms it is a qualifying longevity annuity in an insurance certificate, rider or endorsement.

To learn more about how this change might affect you, please email me or call me at 800-872-6684. I look forward to hearing for you.

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