Using Annuities In Stretch IRA Planning

On January 12, 2001, the IRS surprised everyone by issuing new proposed regulations that make it much simpler or IRA owners to determine their new required minimum distributions (RMDs) by using a new Uniform Table. RMDs are the amount that must be withdrawn starting no later than April 1st of the year after the IRA owner reaches 70 ½. Even more beneficial, these new regulations made it easier for IRA beneficiaries to “stretch” the income taxes they must pay when they inherit an IRA.

To understand the benefit of the new regulations, it is helpful to understand the old regulations first. Under the old rules failure to plan ahead meant distributions from an inherited IRA had to be withdrawn by non-spouse beneficiaries over a period no greater than five years. Since IRAs are tax-deferred, this created a tax dilemma for beneficiaries who had no choice but to incur the tax liability over a relatively short period.

Under the new rules, each beneficiary is entitled to spread out or “stretch” their portion of the inherited IRA over their individual life expectancy. The advantages of this change are dramatic. First, by stretching the distributions over the course of the beneficiary’s lifetime, the remaining IRA balance can continue to grow tax-deferred. Second, rather than being walloped with income taxes from a short five-year period, the beneficiary can dramatically lower the tax since the distribution is lessened.

For individuals with large estates who don’t anticipate accessing their IRA at retirement, using the stretch approach can leave a legacy by extending the proceeds over as many as three generations.

Annuities, as well as other investments, can be used in Stretch IRA planning. However, some advisors question using annuities to fund an IRA since the IRA is already tax-deferred. Fixed annuities can be a smart choice for IRAs and a “stretch” strategy because they contain benefits and features that cannot be found in other investments. Consider equity-indexed annuities. They credit interest on positive changes in a major market index ,most commonly the S&P 500® Index, without ever risking loss to principal. Equally as important, gains credited can never be loss, even if the index recedes in subsequent years. Can mutual funds do that? Can stocks do that?

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