New Longevity Annuity Rules: 5 Things to Know

retirement-exit-2My Comments: Earlier this week I introduced the idea of a QLAC. If you didn’t see it, click on the link and check it out.

Some of you are going to want to use this contract as soon as it becomes available this fall. Others are going to think about how your investment mix will change today so that money in a QLAC is maximized by the time you are 85 years old.

Another reason for consideration is that while annuities are a contentious topic, they have their advantages. Some advisors swear by them; others say the fees will kill you. In my opinion, they have their uses when clients are fearful of how life might play out and the insurance element built into annuities provides a peace of mind dividend that can be found in no other product or investment.

What these new rules do not appear to include are 403(b) accounts, which are very common here in Gainesville. That’s because a 403(b) is a generic equivalent of a 401(k), but for the non-profit world only, such as the University of Florida or Santa Fe College. The answer may be to transfer money out of your 403(b) into an IRA at retirement, with up to 25% going into a QLAC.

By Nick Thornton July 15, 2014

Retirement account holders can now put 25% of their money in QLACs.

In recognition of the reality that many Americans will live well into their 80s, the Department of Treasury recently issued final rules making Deferred Income Annuities more accessible to those with good genes and perhaps inadequate savings.

The rules could be a game changer for how boomers, and their advisors, allocate 401(k) and IRA assets going forward.

Here is a breakdown of the core provisions to 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 1/2.

2. Longevity annuities will distribute cash at a set age, typically by 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 percent 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 into 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.

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