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Life Health > Annuities > Fixed Annuities

Use an Annuity to Solve the Stretch IRA Problem: Idea File

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What You Need to Know

  • The stretch IRA strategy once helped clients pass IRAs on to any desired heirs.
  • The Secure Act sharply limited the tax-deferring powers of inherited IRAs.
  • Mettler contends that a single-premium immediate annuity can give an IRA durable stretchiness.

Gary Mettler believes he has discovered a solution to a painful new estate planning problem: the death of the stretch IRA.

Mettler — who bills himself as the “Annuity Maestro” — says the new IRS proposed required minimum distribution regulations show that taxpayers can get around the effects of the change by making single-premium immediate annuities, or SPIAs, part of their estate planning arrangements.

The IRS intends to let taxpayers pass both SPIAs and inheritable defined benefit pension plans on to children, grandchildren, siblings, friends and other heirs in a way that can hold down the heirs’ tax bills, Mettler said Wednesday in an email.

From the perspective of the IRS, the stretch IRA rules in the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019 apply only to defined contribution plans and investment IRA accounts, not to SPIAs, Mettler added.

SPIAs “are not the industry favorite sons,” Mettler said. “The annuity industry itself has not been very supportive, as they prefer their agents to continue to sell investment/savings design annuity contracts.”

But increasing use of SPIAs may now be a good tool for helping clients meet planning objectives, Mettler said.

Mettler has been writing about the SPIA solution on LinkedIn.

Colleagues have greeted the commentaries with enthusiasm but say they would like to tax lawyers, accountants and insurers that issue SPIAs weigh in.

Follow-up: Mettler’s reading of the draft regulations represents his view of what the IRS is saying, not a tax advisor’s interpretation of final IRS regulations.

Since the original version of this article was published, other advisors have weighed in and said they believe that the IRS comments about annuities apply only to the annuity benefits streams coming out of employer-sponsored pension plans, not to individual annuities, and that Mettler’s strategy probably won’t work.

Readers should talk to their own tax advisors before thinking about using a SPIA or any other arrangement in efforts to solve the stretch IRA problem, the critics say.

What It Means

If Mettler is right, and you work in the areas of annuities, retirement planning or estate planning, you might find yourselves helping clients find the life insurers that do like to sell SPIAs, to help those clients pass retirement savings on to heirs.

Tax Expenditures

Clients and their financial professionals see efforts to reduce federal income taxes as a natural human activity.

The federal government sees the tax revenue lost due to use of IRAs, 401(k) plans and other retirement savings arrangements as “tax expenditures.”

When members of Congress propose legislation that will cut federal revenue or increase federal spending, they are supposed to offer ideas for offsetting the impact of those changes on the federal budget deficit.

One way lawmakers can find “pay fors” is to look at the lists of tax expenditures that the Office of Management and Budget publishes along with the president’s federal budget proposal every year, and to look at Congressional Budget Office reports on pay-for ideas.

One popular source of pay-fors is rules that help relatively affluent people cut the amount of federal income taxes they and their heirs pay.

Lawmakers used a change in the stretch IRA rules to offset about $16 billion of the Secure Act budget impact over the period from 2020 through 2029, according to a Congressional Research Service report on the stretch IRA proposal.

The Stretch IRA

A traditional IRA lets the owner deduct the contributions from taxable income. When the owner reaches the required minimum distribution age, currently 72, they must begin taking withdrawals from the IRA.

If the IRA owner has enough taxable income, they will have to pay federal income taxes on the RMD amounts.

The RMD rules also limit an IRA holder’s ability to use a traditional IRA as a tax shelter or as an estate planning tool, according to the Congressional Research Service analysis.

But, before 2020, any heirs who inherited traditional IRAs could stretch the account’s tax-deferring power by basing calculation of the RMD amounts on their own life expectancy.

The older periodic payment annuity (SPIA) contracts only continue to be favorites of “old timer” agents, and of course the educator and economist/pension communities are natural supporters.

The Secure Act Changes

The Secure Act changed the rules for those who inherit traditional IRAs.

Now, most heirs must take all of the cash out of the IRA within 10 years, and include all of that cash in taxable income during that 10-year period.

The Secure Act exempts four classes of “eligible designated beneficiaries” from the 10-year rule:

  1. Surviving spouses.
  2. Disabled or chronically ill beneficiaries.
  3. Beneficiaries who are not more than 10 years younger than the original IRA owner.
  4. Any children of the IRA owner who are under age 21.

The changes have discouraged use of the stretch IRA strategy by IRA owners who believe that the beneficiaries inheriting the IRAs may well be adult children, nieces, nephews or other people off the eligible designated beneficiary list.

The SPIA Solution

Mettler has a bachelor’s degree in economics and accounting from the University of California, Santa Barbara.

He is not a lawyer.

He has worked as a manager on the annuity brokerage team at Jackson National, and as the advanced sales officer for Presidential Life Insurance Co. At Presidential Life, he led marketing initiatives for SPIAs and other types of annuities.

He has written a book about immediate annuities — “Always Keep Your Hands Up!

An immediate annuity is a contract that pays a stream of benefits that starts shortly after the customer pays for the annuity.

A SPIA is a type of immediate annuity that’s purchased with a large lump sum of cash.

Mettler has based his SPIA solution proposal on his reading of the text of the new proposed RMD regulations, including the proposed regulations.

Based on the text in that section of the proposed regulations, “anyone can do a stretch IRA by purchasing a very simple IRA periodic payment annuity and name anyone they want, without conditions, to succeed them,” Mettler said.

(Image: Jason Stitt/Shutterstock)


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