22 July 2017

New Income Annuities for Retirement Accounts

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Deferred income annuities (DIAs) are hot products. And new IRS regulations may turn up the flame, introducing a special DIA for creating income inside a retirement account. DIA sales hit $710 million in the second quarter — 33% higher than Q2 a year ago. About three-quarters of DIAs are held inside IRAs.

To understand whether a DIA should be in your retirement plan, you must understand how they work. They have pros and cons. With a DIA, you usually pay a substantial amount upfront. Then you receive a series of payments, starting at a set future date.

The longer you wait for the start of your DIA benefits, the higher the benefits will be. Once you start to receive this higher income, the payments will keep coming to you until you die — and afterward, perhaps, to a survivor.

For example, if you're 55, with $100,000 to invest for retirement. An immediate annuity might pay about $5,500 a year for the rest of your life. But suppose you agree to wait 15 years, until age 70, for payouts to begin. If you shop around, you can likely find a DIA that pays, say, $16,000 a year for today's $100,000 outlay.

Annuity payouts vary widely from company to company. And specific features can make a huge difference. As mentioned, IRAs hold many DIAs. But traditional IRAs have required minimum distributions (RMDs) after age 70-1/2.

Less Strain 

The new IRS regs ease the strain. Eligible DIAs in a retirement account will be called qualified longevity annuity contracts (QLACs). The money you put into a QLAC won't count for RMD calculations. For you to get the tax break, your QLAC must meet several criteria. You must begin to take income by age 85 or earlier. And you can't get money from a QLAC other than as annuity payments.

For example, some annuities give you a lump sum in exchange for surrendering your policy. You can't do that with a QLAC. QLAC contributions are capped in two ways. First, there's a 25% limit on how much of your retirement fund you can use.

For instance, a hypothetical individual has a total of $100,000 in her traditional IRAs at year-end 2014. In 2015, Troy can invest up to $25,000 of that balance in a QLAC. That's the limit, whether his $100,000 is in one or multiple traditional, SEP or Simple IRAs.

There is also a $125,000 limit on the amount you can invest in QLACs. That number will be adjusted for inflation. So even if Troy's IRA grows to $1 million, she'd still face the $125,000 cap. But a QLAC in a Roth IRA won't be hit by the 25% or $125,000 limit. Employer retirement plans can also offer QLACs if the company chooses. If it does, then the 25% limit applies to each plan. The $125,000 cap is also for all retirement plans, including IRAs as well as 401(k)-type plans.

The QLAC regulations came out in July. Products will likely be available late this year or early next year, says Stan Hitchcock of stantheannuityman.com.

 
Click here to access the full article on Investors.com

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