What the Secure Act Means for Annuities

In the investment world, an annuity is a fixed sum of money paid to an individual each year, usually for the rest of his or her life. You can think of it as a form of insurance or investment entitling the beneficiary to annual payments during retirement. In many ways, annuities are considered ‘insurance for retirement’ because they give beneficiaries a guaranteed income stream beyond their pension.

Learn about the other notable changes introduced by the SECURE Act here.

The SECURE Act became law on January 1, 2020. Its passing means:

• There’s more time in Individual Retirement Accounts (IRAs) and 401(k)s: Under the bill, required minimum distributions begin at age 72 from 70½ previously. This means you can still contribute to your IRA beyond the age of 70½.

• More annuity investment: Employer-sponsored 401(k)s now have the ability to include annuities as investment options. Small businesses can also join group plans.

Before the SECURE Act was implemented, annuities weren’t popular in 401(k) or other Defined Contribution Plans because employers assumed the entire legal burden if the insurer failed to make the promised payment. The SECURE Act does away with this through a specific provision called Section 203 (Disclosure Regarding Lifetime Income). Under this section, plan fiduciaries and plan sponsors have no liability under the Employment Retirement Income Security Act (ERISA) in the event of the insurer’s payment disruption.

Learn more about 401(k) retirement plans here.

Like any investment option, annuities have their pros and cons. Here’s how those advantages and disadvantages play out in defined contribution plans like 401(k)s.

Pros

• Annuities can provide lifetime income: Unlike traditional investments, annuities can provide guaranteed income for as long as you live. This means you’ll have more resources to supplement Social Security.

• Tax-deferred status: Deferred retirement annuities, which aren’t collected until a specified date, enjoy a tax-deferred status. That means you won’t pay taxes until you begin collecting.

• Guaranteed rates of return: With fixed annuities, you get guaranteed rates of return that ensure a steady (and predictable) stream of income.

Cons

• Complexity: There’s a reason why annuities have gotten a bad rap in the investment world: they can be overly complex. The SECURE Act could see an explosion of new annuity products flooding the market, making it harder to choose.

• High fees: Annuities are also expensive. Since most are sold through agents, expect to pay high upfront costs and other fees.

• Tax penalties for withdrawal: Some annuities enjoy tax-deferred status, but if you decide to take withdrawals early, any net returns will be taxed as ordinary income.

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The SECURE Act has made annuities a more attractive option for retirement planners. If you decide to go down this route, make sure to get over the fees and tax implications of early withdrawals. It can save you a lot of money in the long run.

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