ACLI, IRI Praise New Treasury Rules on Deferred Annuities in Qualified Retirement Plans, IRAs
July 3, 2014 by Fran Matso Lysiak
OLDWICK, N.J. – The American Council of Life Insurers and the Insured Retirement Institute are praising new rules issued by the U.S. Department of the Treasury and Internal Revenue Service that allow access to deferred annuity options in qualified retirement plans, including individual retirement accounts, intended to help people not outlive their money during retirement.
The Treasury-IRS rules make “longevity annuities” accessible to 401(k) retirement plans and IRAs by amending required minimum distribution regulations, according to the ACLI. The final rule by Treasury concerns qualifying longevity annuity contracts, or QLAC, the IRI said in a separate statement. With these contracts, an income stream starts at an advanced age, such as 80 or 85.
The rules represent “a huge announcement” in our industry, said Lee Covington, the IRI’s general counsel and senior vice president, noting they take effect immediately. They allow someone to protect against their longevity risk, or “the risk of outliving their assets at a later age.”
Until now, this type of annuity generally hasn’t been used in 401(k)s and IRAs due to concerns about the required minimum distribution rules. People generally must begin taking minimum distributions from these plans and accounts at age 70 1/2, the ACLI said.
Under the new QLAC rule, the value of the annuity contract would be excluded from the account balance used to determine required minimum distributions, according to the IRI.
While the ACLI said it is still reviewing the rules, “it is clear that they represent wise public policy.”
But Jeff Voudrie, president of Common Sense Advisors, which provides portfolio management to middle Americans, maintains the new regulation is about the insurance industry getting “a carve-out” in the tax code that also gives it “an unfair advantage” against their competition.
For example, say that someone age 65 has $1 million in an IRA and has sufficient income that they want to delay distributions from their IRA as long as possible. Currently, IRS rules require them to take a required minimum distribution starting at age 70 1/2 so that the government can collect taxes on those monies, Voudrie said. This regulation changes that — but only if the money is invested in the longevity annuity contract, Voudrie said. The income from these annuities isn’t designed to start until age 80 or 85, so that means that the investor can defer taxes on that money for another 10-15 years, he said.
The average American doesn’t have significant holdings in their IRA, Voudrie maintains, noting the rules provide a tax cut to the wealthy.
They also will result in “a competitive disadvantage for the non-insurance financial services industry and could have a significant impact on the brokerage industry.”
Covington disagreed, saying there is no unfair advantage, and the required minimum distribution rules are designed so people “don’t game the system for estate planning.”
As for the impact on brokers, this will provide them with “another tool in their tool belt” to help clients with their retirement planning, Covington said. Some people “really want this to protect against the risk of outliving their assets at an advanced age.”
Overall, this represents “a common sense solution to a problem that millions of Americans face,” Covington said. Treasury recognized “it made a lot of sense” to have people take responsibility for their own retirement.
The Treasury and IRS said the new rules will make it easier for retirees to consider using lifetime income options, according to the ACLI’s statement. Instead of having to devote all of their account balance to annuities, retirees who wish to follow a combination strategy that uses a portion of their savings to purchase guaranteed income for life while retaining other savings in more liquid or flexible investments will be able to do so, the statement said.
The rules represent “national retirement policy moving in the right direction,” the ACLI said.
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)
BN-NJ-7-3-2014 1405 ET #
