Consider IRA Immediate Annuities For Required Minimum Distributions
The 2001 changes to the minimum distribution life expectancy payout percentages for Individual Retirement Accounts have come a long way in addressing the IRA account transfer and longevity concerns of retirees. However, these new payout calculations are based on the premise that less is better.
What about clients who depend on their IRA for a substantial part of their income during their lifetime and cannot settle for less?
With the “new and improved” IRA immediate annuities that are now on the market, you may be able to help this particular client.
Most agents and clients still dont know much about these annuities, so lets explore them here by looking in on a hypothetical discussion between an Agent (A) and a recently retired client who has a lot of questions (Q).
A: If you are retired you may be eligible for substantially more retirement income you cannot outlive, as outlined in the Internal Revenue Code. The problem is, you may not know anything about it!
Q: What are you talking about?
A: This is 1.401(a)(9) of the IRC, modified 2001. If you are age 70 and older, you now have two basic minimum distribution methods to choose from when taking income from your IRA.
–The first method, recalculation, requires you to recalculate your life expectancy each year to determine what percentage of your IRA you must withdraw, ultimately requiring you or your heirs to take out more and more of your IRA until it is depleted. You can take more than the minimum, accelerating the depletion of your IRA, causing you to run the risk of outliving your retirement funds. Withdrawal calculations are based on your IRA account balance as of each December 31st.
–The second, and little known IRS distribution method, available since 1974, is the use of an IRA Immediate Annuity. Issued by an insurance company, this annuity can be purchased at any age.
Basically, an IRA immediate annuity is a systematic payment of principal and interest payable over your life or the lives of you and your heirs, no matter how long you or they live. The issuing insurer guarantees these payments, which in many cases are much higher than with method 1.
These higher payments result from a combination of current credit for future interest earnings and life expectancy assumptions. Unlike the first method, these payments are calculated only once, at initial purchase.
Q: Can I have an IRA immediate annuity and still stay in the stock market?
A: Yes. There are variable immediate annuities that allow you to participate in the market and still take advantage of the IRA immediate annuity distribution method. (Income can fluctuate.)
Q: I heard that once you start an immediate annuity, your money is completely locked up?
A: Not any more. Though immediate annuities are considered long-term contracts, insurers are beginning to give consumers the right to commute–or “cash in”–their immediate annuities if personal circumstances dictate.
Q: Why dont we know more about IRA immediate annuities?
A: With the advent of IRAs in 1974, the focus has been on IRA custodial accounts vs. IRA annuities that originally lacked flexibility. Banks, brokerage firms and mutual funds have sold the bulk of the IRA custodial accounts (which now account for millions of dollars of revenue in fees and commissions) but theyve provided little or no education about IRA immediate annuities.
According to a recent study by the Investment Company Institute, Washington, D.C., banks, brokerage firms and mutual funds control almost 88% of the traditional IRA marketplace.
Q: Are employers required to tell employees, close to retirement, about IRA immediate annuities?
A: Unfortunately, no. Even though retirees are living longer and risk outliving their retirement funds, and though the federal government requires certain employers to offer pre-retirement counseling, there is no requirement to discuss the risks associated with the many years an individual will spend in retirement. Further, there is no requirement to discuss possible advantages of immediate annuities, including retirement income, guaranteed by the insurer, that a retiree, spouse and/or heirs cannot outlive.
Q: What if I dont want more income because I dont need it? What if Im more concerned with the impact of income and estate taxes on my assets, and what will be left for my heirs?
A: A valid concern. Insurers are becoming more creative in designing immediate annuities with some of the same flexibility found in custodial accounts. If you dont need extra income, IRA immediate annuities can still make sense as an income generator to help with the efficient transfer of assets from one generation to the next, including making ongoing premium payments for a life insurance policy on the IRA owner or spouse of the IRA owner.
In conjunction with appropriate legal and tax counsel, you may be able to greatly reduce the erosion of your assets from the effects of income and estate taxes.
Q: Im in poor health. Is this IRA immediate annuity something for me?
A: Maybe. You, or you and your heirs, may be eligible for even larger systematic payments over your life expectancy based on the degree of your poor health. Insurance companies know that chronic health conditions can translate to a shorter life expectancy. Some of these companies have agreed to increase immediate annuity payments based on a persons older “medical” age vs. actual age.
is executive vice president of sales and marketing for Financial Rate Watchers, Inc., Longwood, Fla., His e-mail is: firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.