The part of the new “Securing a Strong Retirement Act of 2020″ bill getting the most attention may be the section that would increase the required minimum distribution (RMD) age for individual retirement account (IRA) assets to 75, from 72.
Another part of H.R. 8696, Section 202 could increase use of a product that’s popular with retirement policymakers: the deferred income annuity.
A deferred income annuity, which is also known as a longevity annuity, is a product that’s designed to start paying a stream of benefits at a designated time in the future, such as when a retirement saver turns 85, and then to continue to pay benefits for the rest of the annuitant’s life. A defined income annuity can protect a client against “Methuselah risk,” or the risk that the client will run out of retirement resources due to living much longer than expected.
- Links to Secure Act 2.0 bill resources are available here.
- A Brookings paper on why economists seem to like deferred income annuities more than retirement savers do is available here.
- A general article about the Secure Act 2.0 bill is available here.
Economists and other theorists say deferred income annuities can help protect consumers against Methuselah risk for a very low price, because the issuer has to pay a large amount of benefits only if the annuitant lives for an unusually long time.
A “qualifying longevity annuity contract,” or QLAC, is a deferred income annuity designed for use inside an individual retirement arrangement.
A client can use a QLAC to put off collecting RMDs past age 72. Because that kind of move can reduce federal government tax revenue, by delaying the year when a taxpayer using a traditional IRA starts including IRA distributions in taxable income, federal tax rules impose a limit on the amount of IRA assets that a client can put in a QLAC. The QLAC conversion maximum is 25% of IRA assets, up to an inflation-adjusted limit. The limit for 2020 is $135,000.
Here are five other things to know about QLACs and H.R. 8696 Section 202.
1. The deferred income annuity market has been a relatively small market.
Deferred income annuities accounted for just $823 million of the $104 billion in U.S. individual annuity sales recorded in the first half of the year, according to the Secure Retirement Institute.
2. H.R. 8696 Section 202 would eliminate the 25% of IRA assets QLAC conversion limit.
The section would also increase the maximum conversion amount to $200,000. That new $200,000 limit would then be adjusted annual for inflation.
3. H.R. 8696 Section 202 would set rules for couples who buy a QLAC and then divorce or separate.
If a couple with a QLAC broke up, and one former spouse died, the survivor could still collect the previously arranged QLAC benefits, as long as any qualified domestic relations order or divorce or separation instrument provided for the former spouse to collect the survivor benefits.
4. Taxpayers could use the increased QLAC conversion limit rules as soon as the legislation containing Section 202 was enacted into law.
Taxpayers would be able to rely on “reasonable good faith interpretations” of the conversion limit section while waiting for the U.S. Treasury secretary to develop regulations implementing the section.
5. Congress has considered similar legislation before.
Provisions calling for the QLAC conversion limit to be increased to $200,000 have been included in S. 3781, the “Retirement Security and Savings Act of 2018″ bill; H.R. 4524, the “Retirement Plan Simplification and Enhancement Act of 2017″ bill; and “S. 1431, the “Retirement Security and Savings Act of 2019″ bill.
S. 1431 was introduced by Sen. Rob Portman, R-Ohio, in May 2019 and is still active in the Senate. The bill is under the jurisdiction of the Senate Finance Committee. The bill has one cosponsor, Sen. Benjamin Cardin, D-Md.
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