Last week, the U.S. Treasury Department proposed changing Internal Revenue Service rules to make it easier for people saving for retirement -- or actually living in retirement -- to use some of the money in their 401(k)s to buy annuities that guarantee monthly payments until they die. These changes are a real retirement-planning boon.
Here are key changes Treasury suggests:
- 401(k) plan sponsors could split options, giving employees the choice of putting part of their money in an annuity that provides a lifetime stream of income, while rolling the remaining amount into an IRA when they retire. This eliminates the concern many employees have about putting all their eggs in the annuity basket.
- The new rules change how the plan sponsor must calculate the actuarial assumptions of partial annuities, making it less costly (and more paperwork friendly ) for plan sponsors to give employees this choice.
- Minimum distribution requirements would be revised to make it practical to put money in annuities, especially longevity annuities, which don't begin to pay out until the recipient reaches age 80 or 85. Under the proposal, Treasury says that an annuity that costs no more than $100,000 or 25 percent of the account balance and begins by age 85 doesn't have to be included in determining required minimum distributions until after an employee actually starts getting the money.
- Employees who have both defined benefit pension plans and 401(k)s would be permitted to roll some of the money in their 401(k) into the defined benefit plan to increase the amount of their monthly payment.
- Employees who are in the process of saving for retirement would be able invest their account balances in lifetime income benefits either incrementally or all at once. The ruling also resolves how spousal consent rules will be managed in these circumstances by delaying when a spouse has to give consent to a payout plan until the point at which the employee is ready to start withdrawals.