Beginning this week, you can buy insurance within your 401(k) or IRA that will help protect you against living too long and running out of money.
The Treasury Department and the IRS released final rules allowing and regulating longevity annuities purchased within tax-deferred retirement plans. Also known as an advanced life deferred annuity, longevity annuities are designed to provide guaranteed income for life. You buy it -- often for a relatively small sum -- and leave it untouched until you reach old age -- typically at age 80 or 85. Then you begin receiving regular payments for the rest of your life, replenishing your nest egg just as inflation and other demands have depleted it.
An added tool in the retirement tool box
"As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live," said J. Mark Iwry, senior adviser to the Secretary of the Treasury and deputy assistant secretary for retirement and health policy, in a press release.
Previously, longevity annuities didn't work very well in a tax-deferred retirement plan because of the IRS requirement that you begin taking required minimum distributions, or RMDs, and paying taxes on the money at age 70 1/2. The new rules offer a way around that.
Recently released rules from the Treasury Department say:
- Participants in 401(k)s or similar plans and IRA accountholders may use up to 25 percent of their account balances to a maximum of $125,000 to purchase a longevity annuity without being required to make an RMD on that money.
- Participants must begin taking payments on these annuities no later than age 85.
- Providers of these longevity annuities will be restricted from offering lots of bells and whistles, but they will be permitted to sell some extra features for an additional charge, including a refund of the amount the purchaser paid for the annuity, minus any payments already made, if the purchaser dies before reaching the age when the annuity is scheduled to begin payments or doesn't live long enough to collect as much as he paid in. Sellers also can provide an option that would continue paying the income to a beneficiary after the annuity owner's death.
- Joint and survivor longevity annuities also will be available for spouses.
- The new rules protect purchasers who inadvertently exceed the 25 percent or $125,000 limit on premium payments, allowing them to correct the error without disqualifying the purchase.
One of the advantages of these annuities is the security of knowing that your money will grow and provide a predictable return without a lot of risk. For instance, according to ImmediateAnnuities.com, someone who uses $40,000 of their IRA savings at age 50 to purchase a longevity annuity could expect to receive about $1,000 a month for life beginning at age 75. If this person waited to purchase an immediate annuity at age 75, he would have to spend about $130,000 to buy the same monthly income.
While you might reasonably argue that investing $40,000 for 25 years in something more aggressive than an annuity would provide a better return, it is also true that anyone who owned this kind of annuity when the Great Recession hit would have enjoyed some peace of mind and maybe a much more comfortable retirement than the someone with a riskier approach to retirement planning.