The Power of the Pension Protection Act

 

Today, Americans have amassed more than $1.6 Trillion of assets in annuities.   Most of these annuities are intended to grow tax-deferred, until the funds are needed to help supplement retirement income or Social Security.  Historically however, the vast majority of annuities are left untapped and continue to grow until the annuity owner passes away.  

 

Annuity owners now realize they may need to use those assets to cover Long-Term Care expenses during retirement, and if the original goal for these annuities has changed, it may be time to consider leveraging the power of The Pension Protection Act (PPA) of 2006.

 

The PPA was enacted by Congress in 2006; however, the provisions for existing annuities, which consumers and advisors are leveraging today, didn’t become effective until recently.   Every situation is unique*, but these provisions generally allow an annuity owner to (1) upgrade an existing annuity to a PPA compliant annuity TAX-FREE, and (2)  then take TAX-FREE distributions to cover qualifying Long-Term Care expenses in the future.

 

Real World Implications.....

Perhaps the best way to see the power of the PPA, is to look at a real life example.   Let’s look at "Suzy", a 65 year old widow, who originally deposited $100,000 into a fixed rate, tax-deferred annuity.   Today, her annuity is worth $200,000 and it has a guaranteed minimum rate of 3%.   Conventional wisdom would be to leave the annuity where it is; since she has such an attractive guaranteed interest rate.  

 

Unfortunately, Suzy has seen a number of her friends and relatives begin to need Long-Term Care, and after speaking with them she now knows most of their expenses are NOT covered by Medicare.  

 

Since Suzy’s goal for her annuity is to now help her cover the cost of future Long-Term Care expenses, the current interest rate and growth of her annuity may not be as important as it once was.  Suzy and her advisor(s) must now determine how to best use those annuity dollars, and mitigate the risk associated with future Long-Term Care needs.   

 

Turning Taxable Gains Into Tax-Free Benefits..... 

Suzy’s original investment of $100,000 (her basis) had doubled to $200,000, and for annuities purchased after Aug 13, 1982, the withdrawal rule is known as LIFO (last-in, first-out).   This means her taxable earnings will come out first, and distributions to pay for future Long-Term Care expenses will result in reportable income in the year it is taken.   By “upgrading” to the PPA compliant solutions, the result would instead be TAX-FREE distributions to cover those same Long-Term Care expenses.  

 

By using the tax code to her advantage, we can show how her old annuity, and its guaranteed 3%, isn't as attractive she thought.   We are also able to help her implement a substantial Long-Term Care plan with ZERO out of pocket cost....

  

As you evaluate existing annuities, consider the future tax implications of using those annuities.  If Long-Term Care planning has yet to be addressed, be sure you use the tax code to your advantage.

 

 

* This information is general in nature and may not apply to everyone - Consult a tax advisor or CPA for individual tax implications with this type of solution.



 

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