Longevity annuity rules: what advisors should know

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Recognizing that many Americans will live well into their 80s –even 90s –the Treasury Department recently issued final rules making deferred income annuities more accessible “to those with good genes and perhaps inadequate savings.”

For advisors and their boomer and retiree clients, the rules could be a game changer for how they allocate 401(k) and IRA assets going forward.

“We are excited that the Treasury Department recognizes the value of deferred annuities and is reducing barriers to using them,” said Ross Goldstein, managing director of New York Life, the leading provider of DIAs, which allow owners to defer the start of guaranteed income payments until a later date.

Overall, annuity sales –and DIA sales in particular –have experienced rapid growth. New York Life’s Guaranteed Future Income Annuity product has surpassed $2 billion in sales since 2011, when DIAs were first introduced.

Total annuity sales rose 11% in first quarter 2014, compared to first quarter 2013, totaling $57.7 billion, according to the LIMRA Secured Retirement Institute. The number of providers has steadily increased, LIMRA said, which augurs well for the market going forward.

Here are the core provisions of the new regulations governing DIAs.

1. Defined contribution participants and IRA owners are now allowed to invest up to 25% of their account balances, or up to $125,000, in qualifying longevity annuity contracts, or QLACs. That money will not be subject to the annual minimum distribution requirements governing 401(k) and individual retirement accounts that begin at age 70 ½.

2. Longevity annuities will distribute cash at a set age, typically 80 or 85. If the owner of the annuity happens to die before they begin to receive benefits from the annuities, all is not lost. The principal and premiums paid on the contract will be returned to the retirement account, where the money is subject to the same laws governing the inheritance of retirement accounts.

3. In the event that investors, and/or their advisors, inadvertently distribute more than the 25% limit to a deferred annuity, the IRS will allow the mistake to be corrected without disqualifying the annuity contract.

4. Lump-sum investments can be made in QLACs, or, salary deferrals can be incrementally made into the contracts, much as they are with a 401(k) plan.

5. Ultimately, the cash value of QLACs is subtracted from the rest of a retiree’s assets in a 401 (k) or IRA when determining the required minimum distributions when they take effect.

Annuities provide guaranteed income –but make sure you read the fine print.

Bruce W. Fraser, a New York Financial writer, is a contributor to Financial Planning.

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