I understand that the Treasury Department just changed the
tax rules so people can now invest IRA money in deferred income
annuities without worrying about required minimum distributions.
Should I invest in this kind of annuity?
It's worth considering when you do your retirement-income
planning. Deferred income annuities (also known as longevity
annuities) have become an increasingly popular way to protect
against the risk of outliving your money in retirement, and not
having to worry about required minimum distributions will make them
even more attractive. With a deferred income annuity, you invest a
lump sum in your fifties or sixties and lock in a guaranteed
lifetime payout that starts at a later date. Nobody knows how long
he or she will live, but having a guaranteed income stream that
kicks in after a certain age can help you plan withdrawals from the
rest of your savings.
"A 65-year-old married couple has a 60% chance that one spouse
will live to age 90 and a 30% chance that one will live to be 95,"
says Lee Covington, senior vice-president and general counsel for
the Insured Retirement Institute, a trade organization of financial
institutions and advisers focusing on retirement income. They can
plan their withdrawals to, say, age 85, he says, and then "have a
longevity annuity to take advantage of if they're fortunate enough
to live beyond that."
The longer you defer the payouts, the bigger the bang for your
buck. For example, if you invest $50,000 in New York Life's
Guaranteed Future Income annuity at age 60, starting at age 80
you'll receive $17,614 each year for the rest of your life. (You'll
get $13,695 per year if you buy a version with a cash refund that
promises that your beneficiary will receive at least the amount of
money you originally invested if you die before receiving the
$50,000 back in payouts.)
The required minimum distribution rules in effect before the
Treasury's ruling made it difficult to make the most of these
products. Because you need to start taking money from your
traditional IRAs and 401(k)s at age 70½ and pay taxes on the
withdrawals, some insurers only let people invest in these products
with money from taxable accounts. Other insurers let people invest
IRA money in deferred income annuities but required them to start
receiving lifetime income before age 70½, and the shorter deferral
period limited the value of their investment.
MetLife, for example, offered deferred income annuities in
401(k)s but required payouts to begin at age 70½. People were
allowed to invest traditional IRA money in these annuities as long
as they agreed to take the required minimum distributions from
another account. If they didn't have another account to tap for
RMDs, they had to start taking income from the IRA at age 70.
(MetLife allows people using Roth IRA money to defer the payouts as
late as age 85, however, because Roths don't have required minimum
The average buyer of deferred income annuities is about 59 and
defers the payouts for seven or eight years, says Joe Montminy,
LIMRA Secure Retirement Institute annuity research director.
Removing the RMD issue creates an opportunity for people to get
higher payouts by deferring longer. Montminy expects that more
companies will enter the market and more advisers will start
recommending these products.
It may take a few months for state regulators to approve changes
to new products from insurers. Insurers are also determining what
this means for people who bought these annuities before the rules
For more information about deferred income annuities and how
they can fit in a retirement-income portfolio, see
Deferred Income Annuities Offer Predictability.