US Treasury plans to change your 401k and IRA into Annuities
The U.S. Treasury Department and Department of Labor are unveiling plans to promote the conversion of 401(k) savings and Individual Retirement Accounts (IRA) into annuities or steady payment streams.
Annuities generally guarantee income until the retiree’s death and designed to protect against the risk that retirees outlive their savings, said David Certner, AARP legislative counsel. “There’s a real desire on a lot of people’s parts to try to encourage something other than just rolling over a lump sum, to make sure this money will actually last a lifetime.”
According to a Fidelity Investments, “the average 401(k) fund balance dropped 31% to $47,500 at the end of March 2009 from $69,200 at the end of 2007.”
There is “a tremendous amount of interest in the White House” in retirement-security initiatives, according to Assistant Labor Secretary Phyllis C. Borzi.
The Investment Company Institute said Americans object to the government requiring retirees to convert part of their savings into annuities. “People value the tool of the 401(k). They do not want government to take it away from them. They think the structure works very effectively,” Paul Schott Stevens, ICI chief executive officer.
“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”
Thomas Jefferson
What are Annuities
An annuity is a contract between you and an insurer - insurance company - under which you make a lump-sum payment or series of payments, which may grow on a tax-deferred basis and then can be distributed back to the owner in several ways.
In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. The defining characteristic of all annuity contracts is the option for a guaranteed distribution of income until the death of the person or persons named in the contract.
There are generally two types of annuities, fixed and variable.
Fixed annuities offer some sort of guaranteed rate of return over the life of the contract. The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account.
Variable annuities allow money to be invested in a tax-deferred manner. Their primary use is to allow an investor to engage in tax-deferred investing for retirement in amounts greater than permitted by individual retirement or 401(k) plans. In addition, many variable annuity contracts offer a guaranteed minimum rate of return, even if the underlying separate account investments perform poorly.
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