A Different Type of Annuity

The IRS established a new regulation that allows a taxpayer to create a “qualified longevity annuity contract.” This annuity contract allows a taxpayer to exclude a portion of their retirement assets from the required minimum distribution calculations, but the taxpayer must use those assets to purchase the annuity contract.

This is how one of these annuities work:

• The distributions for this type of annuity only begins after the purchaser’s 85th birthday. While there is no regulation that prohibits the annuity from beginning earlier, any earlier start date would probably increase the expense of the annuity itself.  
• A person is can only invest either $100,000 or 25% of their retirement assets, whichever is less. The monetary limit is cumulative, and it takes into account of the retirement assets that have been invested in annuity contacts. The percentage limitation takes into account the combined value of all of the taxpayer’s IRAs. The only exception is for Roth IRAs.

These annuities certainly have some advantages, but they also come with a few disadvantages. The annuity itself cannot be a variable annuity, and the annuity will probably be irrevocable. Additionally, these types of annuity do not have a death benefit option. In other words, the only option that one of these annuity holders have upon death is to designate a beneficiary to receive a lifetime annuity.

See Ed Slott, Newfangled Annuities, Financial Planning, May 1, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.