James Pope |


“All Americans deserve security in their later years and need effective tools to make most of their hard earned savings”

J Mark Iwry, senior advisor to treasury department


In July 2014, the Treasury Department (IRS) issued final regulations that will change retirement and investment planning forever. The change is out of necessity to what we called “The Problem” in our January 2015 newsletter. In case you missed it, click here to see our January Dis and Dat.

As we wrote in our previous newsletter, a few trends are hitting society at once. An aging population of baby boomers reaching retirement ages in large numbers and a shift away from corporate pension plans (or defined benefit) toward defined contribution (vehicles like 401-Ks) are a couple of those factors. The third is an increasing life expectancy; during the 20th century, life expectancies increased by almost 50 percent1. Combined, these situations occurring simultaneously require Americans to become personally responsible for managing their money over a longer retirement period. Investment skills are very different (and oftentimes more confusing) than the skills one needed during their working life, a discrepancy that we believe is the motivation behind the treasury department regulations. Hopefully, new regulations will lead to partial solutions of these problems.

The tax change affects the Required Minimum Distribution (RMD). For a refresher, the RMD is also referred to as the Seventy-and-a-Half (70.5) rule by many of our clients. This is the age point where the IRS regulations begin forcing a minimum annual withdrawal from retirement accounts. It is backed up with a 50 percent penalty for noncompliance. For the first time, the July 2014 regulation allows an individual to purchase an annuity (more on this later) to reduce the amount of that required distribution.

The IRS regulations detail a qualifying longevity annuity contract (QLAC) for delaying portions of the RMD; however, it is important to note that not all annuities qualify. Not attaining the proper annuity contract could result in severe penalties; these are policies designed for lifetime payouts. The premium is limited to either 25 percent of the previous year’s IRA balance or $125,000, whichever is less. Over-contributing could lead to disqualification of annuity contracts as well as severe penalties if left unaddressed.There is also a minimum premium of $10,000. The amount placed into this tool is then excluded from the account balance for purposes of determining the RMD.

Under the current regulations, the participant can delay receiving the payout until age 85. The product itself is issued by an insurance company and is referred to as a deferred annuity or longevity annuity. In this annuity, an individual places a lump sum with an insurance company. QLACs cannot be invested into variable or index annuities. One stipulation states that payouts must be delayed until the 13th month after purchase. At a later date (not earlier then 13 months, not later then age 85), the individual begins receiving a monthly amount, which is guaranteed by the insurance company. This reduces the uncertainty of stock market volatility as well as interest rate volatility.

The regulations call for simple choices, but a participant will still have a few to make. The QLAC must be a longevity annuity (see above). The treasury regulations are currently set for inflation adjustments by $10,000 increments. The products cannot be purchased with funds from a Roth or an inherited IRA. Depending on the insurance company, Joint life is available if the spouse is the beneficiary. The issue age of these annuity contracts range from age 0 to 82, and a contract that issues a Cost-of-Living Adjustment (COLA) can be included as a QLAC. As an example of the choices an individual will have, a “return of premium” option can be selected as well as an option to cover single or joint life.

We hope this has shed light on a new treasury department regulation. If the QLAC is something you would like more information about, please visit QLACinvestment.com . We strive to utilize our communications to add to our clients’ understanding of our investment management thoughts, which we hope will help improve long-term performance. For questions and comments, feel free to contact us at 1-866-748-0687 or www.disria.com.


Talk with you soon,

SOURCE: Good news and bad news: you’ll probably live (and work) longer by Jonathan Clements of market watch 4/27/15


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