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New Rules for Annuities and RMDs

Posted on: July 12th, 2014
Distributions from retirement plans become mandatory at 70 ½. In a joint decision, the Internal Revenue Service and the United States Treasury Department have amended Required Minimum Distributions (RMDs) for retirement accounts that include annuities.

As medical technology advances and individuals live longer, comprehensive retirement planning may address what happens if the individual outlives their retirement. Longevity annuities may be used since they distribute later in life, at age 80 or older. The IRS and U.S. Treasury both ruled in favor of amending RMD regulations for longevity annuities.

Other decisions made in the court ruling:
  • Individuals may use a maximum of 25% of a retirement account balance or $125,000 (whichever is less) to purchase a longevity annuity without RMD compliance. (The cap will change in $10,000 increments in the future for cost-of-living adjustments.)
  • If the account owner/annuity owner dies prior to the beginning of the annuity, premium costs will be distributed back to the retirement account.
Longevity annuities offer individuals the ability to make an initial payment, and then receive monthly income that starts many years, usually over a decade or two, in the future. According to The New York Times, “Buying an annuity that doesn’t begin making payments until much later—perhaps more than a decade—is more cost-effective than buying an annuity at retirement and collecting the income immediately.” 

Although the RMD regulations have changed to address annuities, RMDs still remain otherwise. Read about RMD concerns that result from an inherited IRA. Also, last year reports showed that Americans were prematurely drawing on retirement accounts before RMDs began. Unless early withdrawals are part of your overall plan, this may be a risky move and one should reassess options.

Now that there are more retirement options available, it is a good time to review retirement plans with a Certified Financial Planner. The new flexibility with retirement planning provides more opportunity for Americans to plan for and build the retirement they desire.
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