Financial advisers welcomed the Treasury Department's
announcement that it would ease the process by which retirement plans can
purchase deferred income annuities.
The Treasury Department and the Internal Revenue
Service on Tuesday morning announced a final regulation updating the
required minimum distribution laws to make it easier for purchasers to buy
deferred income annuities that start payout as late as age 85.
“Americans are increasingly recognizing that it's hard for
an individual who doesn't know his or her future life span to deal with, to
manage the risk of running out of assets while they're in retirement,” said J.
Mark Iwry, senior adviser to the Secretary of the Treasury and deputy assistant
secretary for retirement and health policy. He made the announcement at the
Insured Retirement Institute's annual Government, Legislative and Regulatory
conference in Washington, D.C. Tuesday.
“It's not a bad idea to be in [a deferred-income annuity]
for some portion of assets; it removes the uncertainty,” said Jim Phillips,
president of Retirement Resources, a firm that specializes in 401(k) plans.
“But participants should know what they're getting into.”
Doug Flynn, an adviser with Flynn-Zito Capital Management,
agreed. “I can look at it from the standpoint where, just like you diversify
your investments and your tax picture, you might want to diversify your income
in retirement,” he said.
Deferred-income annuities — also known as longevity
insurance — permit purchasers to buy a contract and take income at some point
in the future, for example, age 80. Though the Treasury Department and the
Labor Department have acknowledged that workers could benefit from using
deferred-income annuities to ensure they have enough money later in life, there
were still a number of hurdles to overcome.
The biggest hurdle: Since these income streams can begin at
advanced ages, they run counter to the required minimum distribution rules that
require savers to take money from their qualified retirement plans at age 70½.
The Treasury's qualifying longevity annuity contracts rule,
effective immediately, excludes the annuity's value from the account balance
that's used to determine the RMD. This way, the client doesn't need to receive
annuity payments prematurely in order to meet those mandatory RMDs.
Savers in a 401(k) or IRA can use up to 25% of their account
balance, or $125,000 — whichever is less — to buy a qualifying longevity
annuity. That dollar limit will be adjusted for cost-of-living increases.
Still, the increased availability of deferred-income
annuities means that there will need to be more due diligence on the part of
advisers, plan sponsors and workers.
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