When planning for retirement, a prime concern is sources of income and maintaining them over ever longer life expectancies. With fewer of us receiving pensions and questions about Social Security, finding another stream of income has become more important. One of these tools is the deferred income annuity which is purchased well before it is needed and provides an income stream starting at some point in retirement.
On July 1, the Treasury Department announced a new final regulation addressing the use of such annuities within a qualified plan such as an IRA. Distributions from qualified plans in most cases must begin no later than the plan participant’s age 70½. This would pose a problem for participants who had a deferred income annuity that was not supposed to commence until a later age. The new regulation provides that in such case, the value of the annuity could be excluded from the calculation of the minimum required distribution. Thus, the distribution would be smaller and the annuity portion would continue to grow separately until it was time to take distributions as provided in the contract.
There is a limit to the total value of the annuity that may be excluded: the lesser of $125,000 or 25% of the entire qualified plan account balance. This provides plan participants and their advisers a planning opportunity and some flexibility in retirement income choices.
What about the downside? First, a plan participant (and adviser) should consider all aspects of the desired annuity, including the internal costs, the interest rate, choices of investments in the annuity if any, riders such as a death benefit and the overall health and reliability of the insurance company offering the product. Second, note that the money invested in an annuity inside the qualified plan is pretty well tied up in that product and that the income tax benefits of the annuity are not enhanced by holding it inside that qualified plan.
Bottom line – read the disclosures carefully, understand what it is that you are considering, know how the income will be taxed and how your other assets play into this investment. Get some good advice!