NEW YORK (MainStreet) Americans can now take one more step to calm the fear of outliving their retirement assets: in effect, buying insurance to hedge the risk of living too long.
A deferred income annuity, often called "longevity insurance," provides an income stream that begins at an advanced age and continues for the rest of the insured's life. The U.S. Department of the Treasury and the Internal Revenue Service have just announced new regulations which allow such policies to be a part of 401(k) and IRA accounts. Investors can use their retirement savings to provide income after their salary-earning years, and then rely on these late-life annuities to supplement that income during the period when medical costs are likely to be highest.
"All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings," said J. Mark Iwry, senior advisor to the secretary of the Treasury and deputy assistant secretary for retirement and health policy. "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."
The new ruling amends the required minimum distribution (RMD) regulations in retirement plans so that annuity payments aren't triggered early in order to comply with the previous withdrawal requirements.
"This change will make it easier for retirees to consider using lifetime income options: instead 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," the Treasury Department's statement says.
A retirement plan participant may now use up to 25% of their account balance, or $125,000 whichever is less -- to purchase a qualifying longevity annuity, without regard to the minimum withdrawal requirements which begin at age 70.5.
If an investor dies before the annuity payments begin, paid premiums will be returned to their accounts, allowing their initial investment to go to their heirs or the periodic payments may be assigned to a designated beneficiary.
--Written by Hal M. Bundrick for MainStreet