Annuities Deferred Income Annuities Longevity Insurance Qualified Longevity Annuity Contract (QLAC)

QLACs are Here

Since the Treasury and IRS finalized a regulation in the beginning of July blessing the use of qualified longevity annuity contracts, or “QLAC’s,” a lot of people have been wondering when and where they can buy one. Per the last paragraph of my September 15th “Don’t Expect to See QLAC’s Soon” post, speculation was that product launch may begin in the fourth quarter of this year.

The mystery is now behind us. The first QLAC to hit the market was recently released by AIG through American General Life Insurance Co with its American Pathway deferred income annuity. AIG enjoys overall high ratings from independent ratings agencies, including A+, or strong, ratings from Standard & Poor’s and Fitch Ratings, A, or excellent, from A.M. Best Company, and A2, or good, from Moody’s Investors Service.

What’s Different about QLACs?

Subject to their current investment limitation of the lesser of $125,000 or 25% of one’s retirement plan balance, QLACs offer two distinct advantages over other investment vehicles for meeting part of a retiree’s income needs as follows:

  1. A portion of retirement assets exposed to stock market declines can be exchanged for a predictable sustainable lifetime income stream beginning at a specific date up to age 85.
  2. Can defer income taxation of a portion of retirement plan balances for up to 15 years with its exemption from the required minimum distribution, or “RMD,” rules, that otherwise require taking minimum distributions from retirement plans beginning by April 1st of the year following the year that you turn 70-1/2.

Predictable Sustainable Lifetime Income Stream

QLACs are a special type of deferred income annuity, or “DIA.” A DIA is an annuity from which annuitization begins at least 12 months after the date of purchase in exchange for a lump sum or series of periodic payments. The annuitization can be for a term certain or lifetime, depending upon the terms of the annuity contract.

Fixed income annuities, including lifetime DIAs, have previously been allowed to be included in retirement plans provided that payments (a) begin by April 1st of the year following the year that the owner turns 70-1/2 and (b) are structured so that they will be completed distributed over the life expectancies of the owner and the owner’s beneficiary.

QLACs extend the potential income start date of retirement plan assets allocated to them to age 85. In addition to predictable sustainable lifetime income, this enables individuals who have other sources of income to increase the amount of annual income that they will eventually receive from QLAC investments compared to non-QLAC DIAs held in retirement asset accounts.

Circumvent RMD Rules for a Portion of Retirement Plan Assets

Other than converting retirement plan assets to Roth IRAs which often triggers income tax liability at the time of conversion, there has been no other game in town for avoiding the RMD rules prior to QLAC’s. QLAC’s offer an opportunity to defer taxation on up to the lesser of $125,000 or 25% of one’s retirement plan balance at the time of investment.

Depending upon the timing of the QLAC investment and the income start date, the reduction in RMDs and potential income tax savings can be significant. Suppose that you’re 50 and your traditional IRA, which is your only retirement plan, has a value of $600,000. Let’s further assume that you invest $125,000 of your IRA in a QLAC with an income start date of 80.

Had you not invested $125,000 in a QLAC, assuming a 4% rate of return, this portion of your IRA would grow to $273,890 when you turn 70. The first year RMD for this value would be just under $10,000. The income tax savings from not withdrawing this amount of income from your IRA and potential greater amounts for the next ten years could be significant.

QLAC Market

With the release of AIG’s QLAC, the cat is out of the bag. Other insurance carriers are either in the process, or will soon be, requesting regulatory approval for their QLAC offerings. Per my September 15th post, it was, and still is, my personal opinion that widespread availability will not occur until well into 2015. Once this happens and consumers understand and appreciate the two distinct advantages that QLACs offer over other investment vehicles for meeting part of a retiree’s income needs, I believe that demand for this unique product will increase significantly.

Roth IRA

5 Ways to Reduce Your Tax Liability Using Roth IRA Conversions

One of the most important financial goals for retirees is maximization of after-tax income. There are two ways to accomplish this: (a) maximize pre-tax income and (b) minimize income tax liability. A Roth IRA can go a long way toward helping you achieve the latter.

There are two ways to fund a Roth IRA: (a) annual contributions and (b) conversions. Annual contributions, in and of themselves, generally won’t result in a significant source of retirement income due to the relatively low limitation – currently $5,500 or $6,500 if you’re age 50 or older. In addition, eligibility to make Roth IRA contributions is limited to the extent that your income exceeds defined limits.

Roth IRA conversions, on the other hand, have the ability to generate substantial after-tax income while also reducing income tax liability for up to 20 to 30 years or more of retirement. Since income tax liability on the value of Roth IRA conversions will need to be paid, timing of conversions is key. See the May 10, 2010 post, Be on the Lookout for Roth IRA Conversion Opportunities, for a discussion of this topic.

There are five ways that you can potentially reduce your income tax liability and increase your after-tax income during your retirement years by doing Roth IRA conversions.

1. Never pay income tax on the growth of your Roth IRA

While you’re required to include the value of your IRA, 401(k) or other qualified plan assets that you convert to a Roth IRA in your taxable income in the year of conversion, 100% of the growth of your Roth IRA is excluded from taxation. This is true whether or not you ever take any distributions from your Roth IRA.

Individuals who did Roth IRA conversions in March, 2009 when the Dow dipped below 7,000 didn’t mind paying income tax on those conversions in retrospect given the fact that the Dow is currently hovering over 17,000 less than six years later. The income tax savings on the growth of the equity portion of their converted accounts over this period of time plus future potential growth is significant for those in this situation.

2. Roth IRA accounts aren’t subject to required minimum distribution rules

If you don’t do a Roth IRA conversion, 100% of the value of your traditional IRA, 401(k), and other qualified plan assets, including appreciation, will be subject to IRS’ required minimum distribution, or RMD, rules. These rules require you to take annual minimum distributions from your retirement plan accounts beginning by April 1st of the year following the year that you turn 70-1/2. 100% of distributions reduced by any allowable portion of nondeductible contributions are taxable.

As an example, suppose you were born on January 7, 1940 and you own a traditional IRA account with a value of $500,000 on December 31, 2013, you would be required to take a minimum distribution of $21,008.40 from your account by December 31, 2014 and include it in your 2014 taxable income. If instead you owned a Roth IRA account with the same value, you wouldn’t be required to take any distributions from your account.

3. Potentially reduce net investment income tax

The RMD rules sometimes force people to take distributions from their taxable IRA accounts that they don’t need. Often times, they transfer RMDs from their taxable IRA account to a nonretirement investment account and leave them there. For individuals with high levels of income, this can result in additional taxation as a result of subjecting the earnings on their nonretirement account to the net investment income tax of 3.8%. This isn’t an issue for Roth IRA account holders since the RMD rules don’t apply to them.

4. Roth IRA distributions aren’t included when calculating taxable Social Security benefits

The taxation of Social Security benefits is dependent upon your combined income and tax filing status. Combined income includes adjusted gross income, nontaxable interest, and 50% of Social Security benefits.

Single filers are subject to tax on 50% of their Social Security benefits for combined income between $25,000 and $34,000 and up to 85% of benefits when combined income exceeds $34,000. Married filing joint taxpayers are subject to tax on 50% of their Social Security benefits for combined income between $32,000 and $44,000 and up to 85% of benefits when combined income exceeds $44,000.

Roth IRA distributions aren’t included in adjusted gross income, therefore, they don’t affect taxation of Social Security benefits.

5. More opportunities for income tax bracket planning

For all taxpayers, taxable income is subject to seven different rates of tax ranging from 10% to 39.6% depending upon the amount of taxable income. Given the foregoing four potential ways of reducing taxable income and associated income tax liability, Roth IRA conversions can also reduce the income tax rates that are used to calculate income tax liability on other sources of income. This allows for more opportunities for income tax bracket planning to potentially further reduce income tax liability in one or more years.

Although it’s not income-tax related, one other potential benefit of Roth IRA conversions that shouldn’t be overlooked is their impact on the calculation of Medicare Part B premiums. Monthly Medicare Part B premiums currently range from $104.90 to $335.70 depending upon tax filing status and the amount of modified adjusted gross income from two years ago. Roth IRA distributions aren’t included in the calculation of adjusted gross income. As such, they don’t affect the amount of Medicare Part B premiums paid.

As you can see, assuming (a) you can get over the hurdle of prepaying a portion of your income tax liability when you do Roth IRA conversions and (b) you have sufficient nonretirement funds to pay the tax, this can create several tax reduction opportunities as well as a potential reduction of Medicare Part B premiums throughout your retirement years. These benefits, combined with the ability to eliminate taxation on the growth of Roth IRA accounts, can result in greater and longer-lasting after-tax retirement income compared to not doing any Roth IRA conversions.

Deferred Income Annuities Longevity Insurance Qualified Longevity Annuity Contract (QLAC) Retirement Income Planning

Don’t Expect to See QLAC’s Soon

One of the most exciting retirement income planning opportunities since the elimination of the Roth IRA conversion income threshold in 2010 has been approved, however, it isn’t available yet for purchase.

For those of you who may not be familiar with the change in Roth IRA conversion eligibility rules, prior to 2010, only taxpayers with modified adjusted gross income of less than $100,000 were eligible to convert a traditional IRA to a Roth IRA. With the elimination of the income threshold, Roth IRA conversions have soared in popularity since anyone may convert part, or all, of his/her traditional IRA to a Roth IRA. See Year of the Conversion to learn more.

The most recent potential retirement income planning game-changer, qualified longevity annuity contracts, or “QLAC’s,” have received a fair amount of press since the Treasury and IRS finalized a regulation in the beginning of July blessing their use. I have personally written two other articles about them, beginning with 6 Ways a New Tax Law Benefits a Sustainable Retirement published July 25th in the RetireMentors section of MarketWatch and my August 4th Retirement Income Visions™ blog post, You Don’t Have to Wait Until 85 to Receive Your Annuity Payments.

What are QLAC’s?

QLAC’s came about in response to increasing life expectancies and the associated fear of outliving one’s assets. With the passage of IRS’ final regulation, retirement plan participants can now invest up to the lesser of $125,000 or 25% of their retirement plan balance in specially-designated deferred income annuities, or “DIA’s,” that provide that lifetime distributions begin at a specified date no later than age 85. Unlike single premium immediate annuities, or “SPIA’s,” that begin distributing their income immediately after investment, the start date for DIA income payments is deferred for at least 12 months after the date of purchase.

As discussed in my July 25th MarketWatch article, QLAC’s offer a new planning opportunity to longevitize your retirement in six different ways. While longevity is the driving force for QLAC’s, the income tax planning angle, which is the first possibility, has been attracting the lion’s share of media attention. Specifically, QLAC’s provide retirement plan participants with the ability to circumvent the required minimum distribution, or “RMD,” rules for a portion of their retirement plan assets. These rules require individuals to take annual minimum distributions from their retirement plans beginning by April 1st of the year following the year that they turn 70-1/2.

Where Do I Buy a QLAC?

I’ve had several people ask me recently, “Where do I buy a QLAC?” Unlike the Roth IRA conversion opportunity that expanded the availability of an existing planning strategy from a limited audience to anyone who owns a traditional IRA with the elimination of the $100,000 income barrier beginning on a specified date, i.e., January 1, 2010, the implementation of IRS’ QLAC regulation is much more complicated. This is resulting in an unknown introduction date for QLAC offerings.

There are several reasons for this, not the least of which is the nature of the product itself. First and foremost, although an existing product, i.e., a deferred income annuity, or “DIA,” will initially be used as the funding mechanism for QLAC’s, the contracts for DIA’s that are currently available don’t necessarily comply with all of the various provisions of IRS’ new QLAC regulation. While the three mentioned are the most important, i.e., (1) Only available for use in retirement plans, (2) limitation of lesser of $125,000 or 25% of retirement plan balance, and (3) distributions must begin at a specified date no later than age 85, there are other technical requirements that must be met in order for a DIA to be marketed and sold as a QLAC.

In addition to understanding and complying with the nuances of the IRS regulation, life insurance carriers that want to offer QLAC’s are scrambling to restructure existing DIA products and develop new products that will (a) match consumers’ needs, (b) be competitive, and (c) meet profit objectives. This requires a host of system and other internal changes, state insurance department approvals, and coordination with distribution channels, all of which must occur before life insurance companies will receive their first premiums from sales of this product.

Another important obstacle to the introduction of QLAC’s is the fact that fixed income annuities with deferred income start dates, including DIA’s and fixed index annuities, or “FIA’s,” with income riders, are a relatively new product to which many consumers haven’t been exposed. While both products are designed, and are suitable, for use in retirement income plans, most investment advisors don’t currently have the specialized education, licensing, and experience to understand, let alone offer, these solutions to their clients. See What Tools Does Your Financial Advisor Have in His or Her Toolbox?

So when will you be able to purchase QLAC’s? Although current speculation is that product launch may begin in the fourth quarter of this year, it’s my personal opinion that widespread availability will not occur until well into 2015. This will give investment advisers and consumers, alike, additional time to get more educated about fixed income annuities, including their place in retirement income plans. Once the word spreads, I believe that the demand for fixed income annuities will increase significantly, especially if the timing is preceded by a stock market decline.

Annuities Deferred Income Annuities Retirement Income Planning

Consider a Death Benefit When Buying Deferred Income Annuities

If you’re in the market for sustainable lifetime income, you’ve come to the right place if you’re looking at fixed income annuities. A fixed income annuity is a fixed (vs. variable) annuity that provides income payments for your lifetime or for a contractually-defined term.

There are three types of fixed income annuities, each one serving a different purpose in a retirement income plan. The three types are as follows:

The main distinction between the three types of fixed income annuities is the timing of the commencement of income payments. As its name implies, the income from a SPIA begins immediately. The actual start date is one month after the date of purchase assuming a monthly payout.

The income start date of DIA’s and FIA’s with income riders, on the other hand, is deferred. With both DIA’s and FIA’s with income riders, it’s contractually defined and is generally at least one year from the purchase date. Although you choose it when you submit your application, most DIA’s have a defined start date; with some wiggle room available on some products. The income commencement date for FIA’s with income riders is flexible other than a potential one-year waiting period and/or minimum age requirement.

Assuming that a DIA meets your retirement income planning needs, you should always consider including a death benefit feature which is optional with most DIA’s. Keeping in mind that the income start date is deferred, and it’s not unusual for the deferral period to be 10 to 25 years, especially when purchasing a DIA as longevity insurance, you probably don’t want to lose your premium, or investment, if you die prematurely.

If you purchase a DIA without a death benefit or return of premium (“ROP”) feature, and you die during the deferral period, not only will the income never begin, your beneficiaries won’t receive anything either. The death benefit or ROP feature serves the purpose of insuring your investment in the event that you die before your income distributions begin.

So how much does it cost to insure your DIA investment by adding an optional death benefit? To illustrate, I recently evaluated the transfer of $100,000 from one of my client’s IRA brokerage accounts to a DIA. My client is approaching her 65th birthday and, like all individuals with traditional IRA accounts, must begin taking annual required minimum distributions, or “RMD’s,” from her account by April 1st of the year following the year that she turns 70-1/2.

Assuming that $100,000 of my client’s IRA is transferred from her brokerage account to a DIA, and assuming that the income from her DIA begins when she turns 70-1/2, she can expect to receive lifetime monthly income of approximately $600 to $700, depending upon the DIA chosen. In one case, the monthly benefit would be reduced by $2.27, from $691.68 to $689.41 with a death benefit feature. In another case, the monthly benefit would be $1.09 less, at $664.41 without any death benefit vs. $663.32 with a death benefit.

In other words, the cost to insure the return of my client’s investment of $100,000 in the event of her death prior to turning 70-1/2 translates to an annual reduction in lifetime benefits of $13.08 or $27.24, depending on the DIA chosen. Not only is there no question about the value of the death benefit in this situation, it would be negligent in my opinion for any life insurance agent not to illustrate the addition of this feature.

Assuming that a fixed income annuity makes sense for you, and further assuming that a DIA is an appropriate solution as a piece of your retirement income plan, always evaluate your potential lifetime income payout with and without a death benefit.

Roth IRA

Black Friday – Think Roth IRA Conversion

This Friday is Black Friday. It’s the day after Thanksgiving when major retailers open early promoting significant price reductions on lots of items. It has routinely been the busiest shopping day of the year since 2005.

There’s another major sale taking place as I write this post that’s not being publicized. It’s happening in the investment world. It’s one of those perfect storm moments when a confluence of seemingly unrelated factors occurs that results in a short-lived opportunity for those who act on it.

With the recent 1,000 point, or 8%, drop in the Dow Jones Industrial Average (DJIA), closing at 13,593 on September 14th and finishing at 12,588 on Friday, combined with a distinct possibility of higher income tax rates in 2013, with one notable exception, this is one of those moments for individuals considering a Roth IRA conversion.

Let’s start with the exception which is the result of the last major Roth IRA conversion opportunity. In 2010, individuals who did Roth IRA conversions were given the choice of including income from their conversion on their 2010 income tax returns or deferring it. If they chose the latter, they were required to report 50% of the income on their 2011 income tax returns and 50% on their 2012 returns.

Several of my clients did sizeable conversions in 2010, choosing to defer 50% of their Roth IRA conversion income to 2011 and 50% to 2012. While these individuals have enjoyed 30% increases in the equity portion of their Roth IRA accounts since 2010 as a result of the increase in the DJIA from the 10,000 level that will never be taxed, they will also be including large amounts of income from their 2010 conversions on their 2012 income tax returns. Without offsetting losses or deductions, most of these individuals won’t be good candidates for a 2012 Roth IRA conversion.

If your 2012 taxable income is being inflated by a large amount of deferred income from a 2010 Roth IRA conversion without offsetting losses or deductions, you may not be a good candidate for a 2012 Roth IRA conversion. Assuming that you don’t fall under this exception and you haven’t already done a sizeable Roth IRA conversion in 2012, you should be evaluating this strategy as part of your 2012 year-end income tax planning. Once again, there isn’t one, but two, events that make this a potentially timely transaction depending upon your tax situation, either one of which qualifies as a potential trigger.

While it’s possible that the stock market may decline further and income tax rates may not increase in 2013, the recent significant stock market decline in and of itself presents a Roth IRA conversion opportunity. In addition to avoiding taxation on future appreciation of conversion amounts, Roth IRA conversions result in reduction of taxable IRA accounts which in turn offers two other potential benefits.

Smaller taxable IRA accounts translate to smaller required minimum distributions (“RMD’s”) and reduced taxable income beginning at age 70-1/2. In addition, to the extent that you have less taxable income, you may be able to reduce the amount of your taxable Social Security benefits, providing for a second tax reduction opportunity as well as enhanced retirement income longevity.

While you’re setting your alarm clock to take advantage of all of those Black Friday sales, don’t forget about the Roth IRA conversion sale. It may be one of those short-lived investment opportunities that you won’t see for a long time.


Year of the Conversion

If you grew up in my generation, you probably remember Al Stewart’s 1976 hit, “Year of the Cat” from his platinum album with the same name. Well, 34 years later (boy, am I getting old!), 2010 is being dubbed by the financial community as the “Year of the Conversion” in reference to the removal of the income threshold in connection with Roth IRA conversions.

Although the Roth IRA and the Roth IRA conversion technique were both established by the Taxpayer Relief Act of 1997 for taxable years beginning in 1998, like a lot of tax legislation that provides for potentially favorable benefits, the ability to  take advantage of the latter until now has been dependent on one’s income level. From 1998 through 2009, only taxpayers with modified adjusted gross income of less than $100,000 were eligible to convert a traditional IRA to a Roth IRA.

It wasn’t until January 1st of this year that the $100,000 income threshold was eliminated as a result of the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005. Now anyone who has a traditional IRA can convert part or all of his/her accounts to one or more Roth IRA accounts.

What’s So Special About a Roth IRA?

Like a traditional IRA, Roth IRA’s enjoy tax-exempt growth. So long as you don’t take any withdrawals from either a regular or Roth IRA, you won’t pay income taxes on the income earned. This includes interest, dividends, and realized gains from securities sales. Unlike a traditional IRA to which you may make potentially deductible contributions depending on your income, contributions to a Roth IRA aren’t deductible.

So if contributions aren’t deductible and you receive the same tax-exempt growth as a traditional IRA, why do a Roth IRA? There are two main attractions of a Roth IRA that aren’t available to traditional IRA owners:

  1. Nontaxable distributions
  2. No required minimum distributions (“RMD’s”)

Nontaxable Distributions

Whenever a deduction is allowed for contributions to a retirement plan, whether it be an IRA, 401(k), or some other type of pension plan, withdrawals from the plan are taxable as ordinary income just like salary. Since contributions to a Roth IRA aren’t deductible, withdrawals generally aren’t taxable.

There is, however, an important exception to this rule. Any distributions, with limited exceptions that are beyond the scope of this blog post, that aren’t attributable to non-deductible IRA contributions will be taxable as ordinary income if they are taken before the later of (a) five years after the Roth IRA owner established and funded his or her first Roth IRA account or, in the case of a Roth IRA conversion, five years from the date of the conversion, or (b) age 59-1/2. In addition, if the distribution is from a Roth IRA conversion and you are less than 59-1/2 when you take your distribution, it is also subject to a 10% premature distribution penalty.

No Required Minimum Distributions (“RMD’s”)

Whereas contributions to traditional IRA’s are potentially deductible and the accounts also enjoy tax-exempt growth until you begin taxing withdrawals from them, IRS doesn’t allow this nirvana to continue indefinitely. Once you turn 70-1/2, you must begin taking annual required minimum distributions, or “RMD’s,” from your traditional IRA based on the value of your IRA accounts at the end of the previous year using a life expectancy factor from an IRS table. A 50% penalty is assessed on the amount of any RMD’s not distributed.

Roth IRA’s are not subject to the RMD rules during the owner’s lifetime. You can convert 100% of a traditional IRA to a Roth IRA at age 25 and not take any distributions from it for the duration of your life without being exposed to any penalties. Once again, IRS doesn’t allow this benefit to continue indefinitely. Roth IRA’s are subject to RMD’s after the death of the owner. Therefore, if you inherit a Roth IRA, you will be required to take minimum distributions from it.

As you can see, even though we’re in the midst of the “Year of the Conversion,” the two main attractions of a Roth IRA are not bullet-proof. With this in mind, should you convert your traditional IRA to a Roth IRA? Hmm, sounds like an idea for another blog post!

Annuities Retirement Income Planning

Immediate Income Annuities: The Cornerstone of a Successful Retirement Income Plan

Last week’s blog post introduced a powerful income laddering strategy using a customized blend of fixed income annuities to create and optimize retirement income. As discussed, this strategy offers retirees the benefit of predictable inflation-adjusted income streams to close projected income gaps as well as generate tax efficiency for the nonretirement portion of one’s portfolio while reducing exposure to the gyrations of the stock market. Two types of fixed income annuities were introduced: immediate and deferred, with the former being the subject of this week’s blog.

Annuities have a long history, tracing their roots to Roman times. Contracts during the Emperor’s time were known as annua, or “annual stipends” in Latin. Roman citizens made a one-time payment in exchange for a stream of payments for a fixed term or for life.

In 1653, a Neapolitan banker named Lorenzo Tonti developed a system for raising money in France called the tontine whereby individuals purchased shares in exchange for income generated from their investment. As shareholders died, their income was spread among the surviving investors until the last person alive collected all of the remaining benefits. Although the use of tontines spread to Britain and the United States to finance public works projects, it was eventually banned since it created an incentive for investors to eliminate their fellow investors in order to obtain a larger payout.

Private sector annuities have been available in the United States for over two centuries. In 1759, Pennsylvania charted a company to provide survivorship annuities for families of ministers. In 1912, The Pennsylvania Company for Insurance on Lives and Granting Annuities was founded and became the first American company to offer annuities to the general public.

The earliest commercial annuities became the predecessor for immediate income annuities, otherwise known as single premium income annuities, or “SPIAs,” that are in widespread use today.

Immediate income annuities, or SPIAs, are distinguished from deferred income annuities, or DIAs, based on the timing of commencement of payments from the insurance company to the annuitant. “Immediate” is somewhat of a misnomer since the payments don’t begin immediately after investment in an annuity contract. Most annuity investors choose a monthly payout and therefore receive their first payment from a SPIA one month after purchase. Initial payments will be delayed for one quarter, six months, or a year when quarterly, semi-annual, and annual payout modes, respectively, are elected.

While a customized blend of SPIAs when used in conjunction with deferred income annuities, or DIAs, can be an ideal retirement income laddering strategy, an individual SPIA can solve many income needs. As such, it’s often used as the cornerstone of retirement income plans. SPIAs’ unique characteristics and benefits are very appealing to retirees since they include the following, several of which also apply to DIAs:

  1. Immediate, predictable, guaranteed income (subject to individual insurers’ claims-paying ability), often for life, beginning at retirement
  2. Protection against outliving assets
  3. Flexible choices of payment plans to meet one’s needs
  4. Choice of frequency of payments
  5. Reduction of income tax liability through tax-favored status in nonretirement accounts, potential reduction of taxable Social Security benefits, and reduction of required minimum distributions (RMDs) in retirement accounts
  6. Reduced exposure to fluctuation of the stock market to the extent that funds used to purchase SPIAs were previously invested in the market
  7. Reduced dependence on ongoing investment management and associated reduction of investment management fees to the extent that funds used to purchase SPIAs were previously professionally managed

As a tradeoff for the foregoing seven benefits, it must be kept in mind that the purchase of all annuity contracts, including SPIAs, is usually an irrevocable action. Once an annuity has been purchased, the owner doesn’t have the right to terminate the contract and request a refund without incurring a substantial penalty. In addition, depending upon how the payout is structured, it could last for many years, potentially over the lifetimes of two or more individuals.

Immediate income annuities, when properly customized for a particular financial situation, can result in reduced financial worries and an associated positive retirement experience. While they can be an effective cornerstone for many retirement income plans, however, they usually aren’t a total solution for creating and optimizing retirement income.