Longevity Annuities in IRAs & Employer Plans

 

December 15, 2014 – Recently issued tax regulations clear the way for longevity annuities to be purchased through 401(k) and similar employer-sponsored retirement plans as well as individual retirement annuities and accounts (IRAs)…

What Are They?

Longevity annuities are deferred income annuities that provide a guaranteed income stream beginning at an advanced age and continuing for life. Individuals who are worried about the risk of outliving their retirement savings may be interested in purchasing a longevity annuity with a portion of their savings.

Key Aspects of the New Rules

The regulations allow eligible employer plans (and IRAs) to permit participants to use up to 25% of their account balances or (if less) $125,000 to purchase a “qualified longevity annuity contract” (QLAC).

For example, a participant with a 401(k) account balance of $1,000,000 could use up to $125,000 of the balance to purchase a QLAC. The $125,000 dollar limit will be adjusted for inflation periodically.

Distributions from a QLAC must begin no later than age 85. Before annuitization, the value of the QLAC is excluded from the account balance used to determine required minimum distributions (or “RMDs,” the minimum amounts that plan participants and traditional IRA owners generally must take from their accounts each year after reaching age 70½).

The new rules permit a QLAC to have a “return of premium” death benefit. With this feature, premiums paid for the annuity but not yet received as annuity payments would be paid to a beneficiary in the event of death.

The QLAC option may be offered by 401(k) and other qualified defined contribution plans, 403(b) plans, eligible governmental 457(b) plans, and traditional IRAs.

The Lifetime Income Challenge

As more workers retire without traditional pensions and life expectancies increase, the challenge of managing retirement savings to last a lifetime assumes greater importance. Longevity annuities are an option that retirees may wish to consider. Please contact your Dopkins Tax Advisor to explore how they may fit into your retirement planning.

About the Author

Dopkins Tax Advisory Group

Our more than 25 tax professionals include specialists who are proactive, strategic thinkers who work to maximize your cash flow. In addition to cash flow considerations, we also believe that tax planning is most effective when it is integrated with, and fully supports, your business plan and personal goals. Our approach to tax planning will help you better understand the tax implications of any proposed course of action, and together we can make the right decisions for your business. For more information, contact Robert Pollock, CPA at rpollock@dopkins.com.

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