Jul 13, 2014

Qualified plan longevity annuity hedges risk of outliving retirement savings

Are you are concerned about running out of money before you run out of years? With longer lifespans, skyrocketing health costs, the demise of fixed pensions and the looming Social Security crisis, everyone except the wealthiest are feeling skittish these days.

A new kind of deferred income annuity, commonly called "longevity insurance," may provide an answer. In the past, these annuities were unusable in IRAs and other qualified plans because the required minimum distributions (RMD's) from a qualified plan had to take into consideration the value of the longevity insurance annuity. Now, the RMD issue has been resolved as a result of new IRS regulations. The new regulations apply to these annuities if purchased after July 1, 2014.

You may now put a portion of your 401K or IRA into a deferred income annuity. The income stream kicks in when you attain a certain age and continues until you pass away. Effectively, you are buying protection against the possibility that you will outlive your money. Briefly, here are the new rules and features of the longevity annuity as it applies to qualified plans:
  • Up to 25% of the balance in your qualified plan, or a maximum of $125,000, may be put into the deferred income annuity. The dollar limit is indexed to inflation and will increase in the future in $10,000 increments.
  • You must begin receiving the income no later than age 85.
  • You are still required to take Required Minimum Distributions from your qualified plan at age 70 1/2, but the amount of the annuity is excluded when calculating RMD's.
  • Benefits to heirs: There is a return of premium feature. If the purchaser dies before or after the annuity begins, premiums paid but not yet received may be returned to the account, which means the initial investment can be passed to heirs. If the contract includes a life annuity to the surviving spouse, the premiums may be returned after the second death.

As with all annuities, the qualified plan deferred annuity is not right for everyone. If you and your spouse have ample savings and/or other sources of retirement income, you probably don't need one. But keep in mind that when one spouse dies, the survivor often has significantly less retirement income because of the loss of one Social Security check, and possibly the loss of some or all of the decedent's pension. A longevity insurance annuity may provide a safety net to replace that lost income. 

Also keep in mind that a deferred income annuity must be evaluated within the broader context of your estate plan, so be sure to consult with your estate planning attorney.

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