Treasury Opens Retirement Plans to Longevity Annuities

Treasury Opens Retirement Plans to Longevity Annuities

RetireIn a July 1, 2014 release the US. Department of Treasury and the Internal Revenue Service announced a final rule that would facilitate the purchase of longevity annuities for holders of individual retirement accounts and employer-sponsored retirement plans.  A longevity annuity provides a lifetime income stream beginning at an advanced age and helps guard against outliving retirement assets.

“Today’s final rules make longevity annuities accessible to 401(k)s and other employer-sponsored individual account plans and IRAs by amending the required minimum distribution regulations so that longevity annuity payments will not need to begin prematurely in order to comply with those regulations,” according to the release. “[I]nstead of having to devote all of their account balance to annuities, retirees who wish to follow a combination strategy that uses a portion of their savings to purchase guaranteed income for life while retaining other savings in more liquid or flexible investments will be able to do so.”

Under the new rule the value of a qualified longevity annuity contract, or QLAC, would be excluded from the account balance for purposes of determining required minimum distributions.  A plan participant may use up to 25 percent of their account balance or $125,000 (whichever is less) to purchase a QLAC without regard to the age 70 1/2 minimum distribution requirements.  The rule also provides for an adjustment to the dollar limit for cost-of-living increases.

Another key provision of the rule is a “return of premium” benefit.  It provides that if a purchaser dies before receiving annuity payments, premiums may be returned to the retirement accounts.

The effective date of the new rule was July 2, 2014 and it applies to contracts purchased on or after that date.