Overview of Recent Tax Law Changes Affecting Annuities

1. The Setting Every Community Up for Retirement Enhancement (SECURE) Act

Passed in 2019 and effective from January 1, 2020, the SECURE Act introduced several changes:

• Required Minimum Distributions (RMDs): The age for RMDs from retirement accounts, including annuities held within these accounts, was increased from 70½ to 72. This change allows for more time for the funds to grow tax-deferred before withdrawals must begin.

• Elimination of the Stretch IRA: The act requires most non-spouse beneficiaries of inherited IRAs, including annuities within these IRAs, to withdraw the entire balance within 10 years. This change accelerates the tax burden on inherited accounts.

• Annuities in 401(k) Plans: The SECURE Act made it easier for employers to offer annuities within 401(k) plans by reducing the liability risk for employers. This change is aimed at providing more lifetime income options for retirees.

2. The Tax Cuts and Jobs Act (TCJA)

Passed in 2017 and effective from January 1, 2018, the TCJA brought several changes:

• Lower Income Tax Rates: The TCJA temporarily reduced income tax rates for individuals, which can impact the taxation of annuity distributions. Lower tax rates might make annuity distributions more favorable during the TCJA’s effective period (2018-2025).

• State and Local Tax (SALT) Deduction Cap: The TCJA capped the SALT deduction at $10,000, potentially affecting high-income earners in high-tax states. This change indirectly influences the after-tax value of annuity distributions.

Key Implications for Annuity Holders

Tax-Deferred Growth

• Positive Impact: Lower income tax rates and extended RMD age mean more opportunity for tax-deferred growth in annuities.

• Negative Impact: The elimination of the Stretch IRA accelerates the tax burden on inherited annuities, potentially reducing their value for beneficiaries.

Planning and Strategy Adjustments

• Beneficiary Planning: With the elimination of the Stretch IRA, annuity holders need to consider alternative strategies for estate planning, such as Roth conversions or other tax-efficient transfer methods.

• RMD Strategy: The increased RMD age allows for more strategic planning, potentially reducing the annual taxable income for retirees who delay distributions.

Employer-Sponsored Plans

• Enhanced Options: The inclusion of annuities in 401(k) plans provides more options for securing lifetime income. Employees should evaluate these options carefully to understand the fees, benefits, and payout structures.

Future Considerations and Potential Changes

Given the dynamic nature of tax laws, it's essential to stay informed about potential legislative changes that could further impact annuities. Key areas to watch include:

• Further Increases in RMD Age: There have been discussions about increasing the RMD age beyond 72, which could further extend the tax-deferred growth period.

• Adjustments to Income Tax Rates: Changes in federal income tax rates under future administrations could alter the tax efficiency of annuity distributions.

• State-Level Tax Changes: State tax laws may also evolve, particularly in response to the SALT deduction cap, affecting the overall tax landscape for annuity holders.

Conclusion

Recent tax law changes have introduced both opportunities and challenges for annuity holders. While lower income tax rates and extended RMD ages provide advantages, the elimination of the Stretch IRA necessitates revised estate planning strategies. Annuity holders should work closely with financial advisors to navigate these changes and optimize their retirement planning.

This overview captures the key aspects of recent tax law changes and their implications for annuities. If you need more detailed information on specific points or have additional questions, feel free to ask!