This material is educational and intended for an audience with financial services knowledge.

For more information about retirement-planning, please contact our Retirement Strategies Group at RSG@PacificLife.com or (800) 722-2333, ext. 3939. PacificLife.com

This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. Clients should consult with their accounting or tax professionals for guidance regarding their specific financial situations.

Annuity withdrawals and other distributions of taxable amounts, including death benefit payouts, will be subject to ordinary income tax. For nonqualified contracts, an additional 3.8% federal tax may apply on net investment income. If withdrawals and other distributions are taken prior to age 59½, an additional 10% federal tax may apply. A withdrawal charge and a market value adjustment (MVA) also may apply.

Investors should carefully consider a variable annuity’s risks, charges, limitations, and expenses, as well as the risks, charges, expenses, and investment goals of the underlying investment options. This and other information about Pacific Life are provided in the product and underlying fund prospectuses. These prospectuses should be read carefully before investing.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company and an affiliate of Pacific Life & Annuity Company.

The home office for Pacific Life & Annuity Company is located in Phoenix, Arizona. The home office for Pacific Life Insurance Company is located in Omaha, Nebraska.

Predictable retirement income can allow retirees to have improved confidence as they spend their savings. For many retirees, the largest asset they have is a traditional IRA, and this “spend down” account might be suitable for annuitization.

Many clients need additional predictable income to cover their essential expenses. For some, annuitizing a portion, or all, of a traditional IRA can be a good option. Traditional IRAs must begin distributions during the owner’s lifetime. Annuitization can create predictable income and a consistent 1099, helping retirees gauge their tax bills.

Why might traditional IRAs be considered a “spend down” asset? The IRS requires that a traditional IRA begin distributions—regardless of whether they are wanted or needed—by age 73 (with limited exceptions). Since the Setting Every Community Up for Retirement Enhancement (SECURE) Act limited stretch IRAs to 10 years for most beneficiaries, more retirees may use their traditional IRAs for income and pass nonqualified step-up assets to the next generation(s).

Here are three questions that can help determine whether annuitization might work for a client.

1. Is the Need for Income Temporary or Permanent?

Annuitization tends to work best when income is needed for a determinable period, such as a period of years or a life expectancy. While life or joint-life options are available, the popular payout options are life or joint-life with a period certain or cash refund. Which option to use depends on the circumstances.

• Temporary income need: Clients who want to delay claiming Social Security retirement benefits may want a period-certain payout option to bridge the gap between when they retire and when they claim Social Security retirement benefits.
  
  
• Permanent income need: Clients with a permanent income gap might prefer a life-expectancy payout option. Life or joint-life with period certain as well as life or joint-life with cash refund both allow the client to have lifetime income and assure that beneficiaries receive any unused premiums.

Remember, most non-spousal beneficiaries must receive all assets by the end of the 10th calendar year after the year of the owner’s death. If annuitizing, be sure that the insurance company can support that requirement.

2. What Is the Client’s Tax Situation?

Annuitization payments from non-Roth accounts typically result in ordinary income to the IRA or qualified account owner. If the contact is a fixed, single-premium immediate annuity (SPIA), the plus is that the payments are consistent, which means there is a known taxable amount each year. This may be helpful for clients who want a more predictable 1099.

3. How Might the Payments Affect Required Minimum Distributions (RMDs)?

In many cases, the client will annuitize only a portion of the IRA assets. The annuitized stream of payments addresses the RMDs for the annuitized assets. After the SECURE Act 2.0, any amount in excess of the RMD for the annuitized portion of the IRA may cover RMDs from other IRA accounts.

As an example, Sarah has a gap between the amount needed to cover monthly expenses and her Social Security retirement income. She annuitizes 20% of her IRA to create additional predictable income to cover the gap. Sarah still may need to take RMDs from the remaining IRA assets.

Predictable income enough to cover essential expenses is often beneficial to retirees. While annuities offer many options for creating predictable income, this strategy can work for some retirees. These questions may help retirees with traditional IRAs determine if annuitizing a portion, or all, of the “spend down” account to create income suits their retirement needs.

This material is educational and intended for an audience with financial services knowledge.

For more information on retirement-planning strategies, please contact the Retirement Strategies Group at (800) 722-2333, or email us at RSG@PacificLife.com. 

Attachments/Links 

Annuitizing an IRA and the Effect on RMDs

IRA Rollovers and Lifetime Income: A Game Plan

What Is Your Client’s RMD Plan?

This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. Clients should consult with their accounting or tax professionals for guidance regarding their specific financial situations.

Annuity withdrawals and other distributions of taxable amounts, including death benefit payouts, will be subject to ordinary income tax. For nonqualified contracts, an additional 3.8% federal tax may apply on net investment income. If withdrawals and other distributions are taken prior to age 59½, an additional 10% federal tax may apply. A withdrawal charge and a market value adjustment (MVA) also may apply.

Investors should carefully consider a variable annuity’s risks, charges, limitations, and expenses, as well as the risks, charges, expenses, and investment goals of the underlying investment options. This and other information about Pacific Life are provided in the product and underlying fund prospectuses. These prospectuses should be read carefully before investing.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company and an affiliate of Pacific Life & Annuity Company.

The home office for Pacific Life & Annuity Company is located in Phoenix, Arizona. The home office for Pacific Life Insurance Company is located in Omaha, Nebraska.