IRA Annuity Stretch Disappears Quietly Into the Night

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“We all got up to dance, Oh, but we never got the chance!” – Don McLean

At the stroke of midnight on 12/31/2019, with the Presidential signing of the new fiscal year 2020 appropriations bill with the SECURE Act (Act) attached, the very last effective opportunity to preserve Stretch IRA rights for future decades and to complete a stretch IRA annuity with unlimited funds to any Beneficiary by purchasing a “qualifying annuity” contract passes quietly into the night.

With the Act, first passed by the House in June 2019, a 5 – 6 month window of opportunity existed to purchase a qualifying annuity, as defined by the Act (J&S SPIA contract). Individuals could have preserved their future Stretch IRA rights in the following decades as long as the contract was in-force by 12/31/2019. And if the Senate had acted quickly and the President signed in June, there would have been at least some remaining time to make adjustments and purchase qualifying contracts, if otherwise appropriate. 

However, because the Act subsequently floundered in the Senate and only made it out by the bill attachment process to the 2020 fiscal year budget funding bill, it didn’t actually become law until the President signed it on Friday (12/20/2019). While, in the Senate’s infinite wisdom, Act implementation dates for “certain institutions” affected by the Act were deferred until 01/01/2021 (a whole year from now!) providing these institutions time to make their adjustments, the rule regarding a consumer qualifying annuity purchase was NOT so deferred. So, with no effective remaining time (now what 8 days!) for consumers to preserve their future Stretch IRA rights, the IRA qualifying annuity stretch privilege dies.

[Note: If IRA Holder death already occurred this year (2019) which is, prior to the Act’s effective date of 12/31/2019 then, IRA Beneficiaries (non-spousal) still have one year from IRA Holder date of death to elect a Stretch IRA for all or some portion of their inherited IRAs over their lifetimes using the Single Life Table (SLT). Alternatively, they could also elect a lifetime income annuity (SPIA) as long as the period certain duration (if any) did not exceed the SLT. So, for example, if IRA Holder death occurred July 2019, the IRA Beneficiary would have until July 2020 to make a stretch IRA election.]

Wow, but, you know, I’m actually very proud! Over the years, at least, I had personally helped a dozen or so clients/families to preserve their Stretch IRA rights and I know we issued tons of qualifying annuity contracts during my stent at Presidential Life where this was one of our specialties. So, all these families, regardless of the SECURE Act, will continue to bask in the Stretch IRA sun. And you know what, now, there are a lot of financial advisors and legal types running around (picture Mack Sennett’s Keystone Cops!- Love this clip) dealing with their Stretch IRA DEATH. All, now of course, more than willing to “help” their clients out by coming up with tax liability expensive ROTH or life insurance purchase schemes. It was so all unnecessary.  Not my guys. All good to go because the qualifying contracts they own.

Last June, I had previous blogged on LinkedIn regarding the qualifying annuity purchase opportunity and this very risk. The warning Excerpt:

“If the client wants any hope of preserving their ability to Stretch their Jumbo IRA or, any part of it, to non-spousal individuals for an IRA Owner death occurring many years from now, in light of this legislation, the only method is going to be via an IRA Joint Survivor SPIA with a non-spousal Annuitant. So, you are just going to have to accept the SPIA. If not, then, you simply hope Stretch IRAs somehow, maintain their current status quo (but odds are against it).”

Since that time, I spoke (really begging and pleading) with many individuals; financial advisors, attorneys, distributors and consumers. Many simply dithered the opportunity away or couldn’t deal with the SPIA for various reasons or thought there would be more time consequently, the take up rate was extremely poor. 

What do I always say bout SPIAs? C’mon, you know it, I’ve said it a million times and I’m going to say it again; over the long-term, SPIAs, typically end up proving to be most valuable arrangements.  This is just another great lesson in their staying-power and in this case, in the face of adverse Federal income tax legislation. Too bad many can’t see the value of these very special contracts past their spreadsheets!

So, Now What?

What’s left to us J&S IRA annuity “qualifying annuity” stretch folks? Well, it’s not a complete death. Now, only “qualified beneficiaries” (as defined by the Act) are now eligible for stretch IRA annuity tax treatment. The first exempt Beneficiary class is the Spouse who, regardless of age, is eligible for a maximum 100% Survivor benefit of the annual income. But, spouses were always exempt for stretch IRA annuity purposes. With the classic case being: older man/younger woman. With this combo you can still really hammer down on required minimum distribution (RMD) income and create large internal deferrals to the non-IRA Holder spouse, but the case viability is highly dependent on its prevailing circumstances.  

The next exempt Beneficiary class for a 100% Survivor benefit of the annual income are individuals within 10 years of age. However, just like spouses, they were always exempt. This class is primarily siblings or perhaps a non-married “significant other” but, could also possibly be an adopted child.

The next exempt Beneficiary classes are the disabled and chronically ill (as defined by the IRS). In this case, this could be a child or young adult. However, if the age difference exceeds 10 years, the IRA holder needs to follow the IRS Survivor income table reductions. The Survivorship income reduction table was created in 2006 to compel higher RMD income when you have Joint Annuitants with wide differences in age. The table contains 28 reductions and a modification when “qualifying annuities” are purchased by IRA Holders who are under age 70. If you are going to work in this space, you need to get to know this IRS table.

In all these cases, each Beneficiary class is still eligible for COLAs and period certain features. So, while you can still design for growing internal contract deferrals, and reducing current RMD income, the overall effect and viability is going to be very dependent on individual case circumstances.

Not lending itself to a J&S annuity design, the last Beneficiary class is a minor. A Beneficiary minor, at time of IRA holder death, may make an election via an UTMA custodian or perhaps utilizing a prearranged trust treatment. He/she is eligible for IRA Stretch income withheld (continued deferred) to age of majority then, have up to 10-years to distribute the entire inherited value. If the carrier was willing to vest the contract properly perhaps, a DIA could work here or even a standard deferred annuity.

Existing Stretch IRAs

While the prospects of future Stretch IRAs are now settled, what about existing Stretch IRAs? That’s the $64 question. I think an inkling as to how these consumers with such arrangements might be treated was revealed by the Senate’s decision to cut consumers off at the knees by not extending the “qualifying annuity” purchase cutoff date for at least a year to 1/1/2021 with the other deferred provisions available to certain “institutions”. The Senate knew the bill passage, containing the original cut of date 12/31/2019, was happening late in December and had no love for consumers. I think this is a very telling, a portent of things to come.  The Senate is willing to give institutions a break, time to adjust but, not consumers. Their attitude couldn’t be more crystal clear. 

In light of Senators “behaving badly” and to hedge their legislative risks by preserving their existing Stretch IRA rights that might possibly be impaired in future legislation, consumers might consider a conversion to a permanent lifetime annuity arrangement via an “irrevocable” annuity contract with some of their account balances.  As before, the qualifying annuity contract’s issue date needs to pre-date any future averse Federal legislation regarding existing stretch IRAs. I also have a few clients with these contracts for their existing stretch IRAs so, like their counter parts, these clients will never have to be concerned with a change in the prevailing tax wind.

Now, also let me say, preserving stretch IRA rights should not be the sole determining factor to purchase such a contract. There are quite a few things that also need to be considered in light of individual circumstances to determine if such a transaction is overall beneficial.  It is highly case dependent. But, consumers and their advisors would be wise to start the consideration process now. 

Or, alternatively, you could live with the hope congress magically becomes benevolent and lays off all the existing stretch IRA arrangements. It could happen. But, I suggest, this time around, actually making an effort and plan for “Pearl Harbor”.

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