Deferred annuity tax hurdle cleared

A recent U.S. Treasury Department regulation cleared an obstacle for retirees wanting to use a chunk of their defined contribution plan accounts to purchase retirement annuities that don't pay monthly benefits until long after they have retired.

Known as deferred annuities, they might not start paying a benefit until the buyer turns age 80 or 85. The attraction of such an annuity is that its cost — because of the relatively few years a benefit likely will be paid — is much less than annuities that start at a younger age.

But a big tax issue loomed. Tax law required that defined contribution plan beneficiaries withdraw a certain amount of money each year from their account balances starting at age 70½.

With deferred annuities not paying benefits until long past age 70½, questions came up as to whether such products would violate the minimum distribution requirements.

In June, though, Treasury eased the problem by saying defined contribution plan participants, namely 401(k) account holders, could use up to 25% of their account balance or $125,000, whichever is less, to buy a deferred annuity. That amount would not be subject to the age 70½ minimum distribution requirement.

The Treasury Department rule “removes an obstacle for opting for a deferred annuity,” said Anne Waidmann, a director with PricewaterhouseCoopers L.L.P. in Washington.