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Treasury Allows Longevity Annuities in 401(k) and IRA Plans

Monday, 27 October 2014 08:01 AM Current | Bio | Archive

Although controversial, the Treasury announced new rules that would allow longevity annuities to be purchased in 401(k) and IRA plans.

Some see this as a great benefit for employees to arrange for guaranteed lifetime payouts. Others believe this is just going to be another insurance scam and that buying a tax-deferred product within a tax-deferred product is not going to be beneficial to the client.

Clearly, whoever requested the Treasury to make this change has a lot of political clout with the administration.

The likely result is that many plan sponsors will be eagerly recommending retirement plans to use a portion of the account balance to purchase guaranteed income and then use the rest for other investments.

The new rules allow participants in 401(k) or IRA retirement plans to use up to 25 percent of the account balance or $125,000 (whichever is less) to buy a longevity annuity without being limited by the 70.5 minimum age distribution requirements.

Given the volatility of the markets, the idea of getting lifetime guaranteed income is a powerful incentive for baby boomers who worry about outliving their retirement nest egg.

Under the previous rules, an employee would include the annuity contract value as part of the account balance in calculating the required minimum distribution from the retirement account. The new rule allows the annuity contract to be excluded.

A further benefit is that if the annuitant — the plan participant — dies the amount of the premium they have paid but have not received back yet in annuity payments will be returned to the 401(k) or IRA account. So at least that amount of the initial investment will still go to heirs.

These annuities come in two basic formats.

One provides for a payment based on deferred income much like a defined benefit plan.

The other provides a guaranteed lifetime withdrawal benefit. This gives some flexibility to stay invested in the market while still having a guaranteed base amount that will be received regardless of market fluctuations.

The new rules are highly technical and still need further guidance and interpretation from the Department of Labor (DOL), which is expected to require employers to provide information to employees illustrating what would be the dollar effect if the current retirement plan account balance would be if it were turned into a projected income stream.

The Treasury and DOL have been working on these rules since 2010. The Treasury has issued its final partial guidance, which should be enough to get some momentum in the marketplace of retirement plans.

The DOL has yet to issue its proposed rules on the lifetime income illustrations. No doubt, it's waiting for some additional encouragement from the insurance industry lobbyists.

Baby boomers in particular are looking for answers on how to make sure they have enough money to carry them through their retirement.

Two questions remain at this time.

Does a 401(k) or IRA plan sponsor offer to a plan participant a longevity annuity as a plan option?

If the plan does, will the participant see value in exercising it?

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Although controversial, the Treasury announced new rules that would allow longevity annuities to be purchased in 401(k) and IRA plans.
annuity, 401k, IRA, plan
Monday, 27 October 2014 08:01 AM
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