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SECURE 2.0 contained a provision that gave favorable treatment to partial annuitization. The reason you haven’t heard about this is because those transactions cannot increase commissionable income.
Increased transactional income, however, is not the only reason to educate an advisor on a law change. Another reason to educate “financial advisors,” who are not “investment advisors,” is to help Americans who receive financial advisory services receive this information, even if it isn’t directly compensable to a financial professional (FP) under today’s regulatory framework.
Ten months have passed since the passage of SECURE 2.0. The financial services industry has seen a flurry of activity to prepare for meeting the roughly 90 provisions outlined in the act. Given the number of objectives mandated by SECURE, any of us should be forgiven for not yet being experts on a given provision, especially if it does not directly impact our practice.
But with all the (very helpful!) media coverage around implementation of SECURE’s many provisions, how could it be that the one impacting the tax treatment of an entire industry segment1escaped the industry media attention necessary for the education of financial professionals?
One reason for lack of media coverage of that provision would be if it improves treatment for an activity that cannot favorably impact FPs’ compensation.
Allow me to explain further.
In this article2, three tax partners at Davis & Harman outlined an example of how, prior to SECURE 2.0, partial annuitization of a qualified account balance led to unfavorable RMD treatment. Prior to SECURE 2.0, income derived from the annuitized portion of a qualified account was not offset-able against RMD requirements from the non-annuitized portion of the account.
In the example outlined in that article, the authors found that, for a $475,000 account owned by a 75-year- old, of which $275,000 was annuitized, over a 20-year period, the cumulative required RMD income was reduced from $323,914 under the old rule to $251,347 (assuming 4% rate of return). The ending account balance after 20 years for the non-annuitized account in that example is $275,964 under the new rule, versus $136,036 under the old rule. This represents a difference of $139,928 in age-95 account balance, or an increase of 103%. This additional amount in the owner’s qualified account could be used for long-term care treatment, a bequest, or other expenses.
This SECURE 2.0 provision can be quite favorable for those individuals choosing partial account annuitization.
Because annuitization of previously sold contracts is not a transaction that is eligible for FP compensation, it is likely this is the only article you will see written on this important SECURE 2.0 provision. Please consider accordingly if any of your clients’ best interests will be met by incorporating this information into their RMD planning.
Annuitization results in not merely a lack of additional FP compensation. Rather, annuitization is likely to be an overall negative event for FP compensation, for each of the three reasons that follow:
1. Annuitization of an existing contract takes time for education and execution of a transaction, but it does not directly result in FP compensation.
2. Selling an annuitized annuity (i.e., a single-premium immediate annuity) prevents the assets in the annuity from being available to drive future transactional compensation for an FP using section 1035.
3. For those advisors who bill on AUM, annuitization results in a reduction in assets upon which to bill.
If it were the case that income under advisement (IUA), rather than AUM, were a codified advisory billing frame (an income-statement-oriented advisory lens rather than a left-side-of-balance-sheet one), there would be advisors who would recommend annuitization to drive higher retirement income amounts. They would want to read articles like the one referenced here to drive their ability to deliver superior outcomes to clients.
Instead, because non-codification of IUA as a billing frame is the current state of U.S. financial services:
1. In-industry media did not cover this provision of SECURE 2.0, which could help many Americans more efficiently receive retirement income if they were so informed by their FP. But for an FP to inform a client, the FP has to see the information in media sources that they read.
2. IRA account balances are left to heirs rather than used as income during lifetimes, thus thwarting the government’s intent to derive revenue from the Revenue Act of 1978.
The Revenue Act is the legislation that, when combined with the Employee Retirement Income Security Act, created the conditions for the defined-contribution industry, from which 90% of IRA assets originate.
3. IRA account balances are left to heirs, thwarting the government’s intent to derive the retirement income from ERISA assets.
As plan sponsors shift preferences towards retaining assets in plan post-retirement, thus making them competitors to non-plan-advisors for managed assets, and advisors are increasingly performing retirement-income planning as core elements of their practices, knowing about this change to partial annuitization RMD treatment would be helpful to advisors and their clients in efficiently generating retirement income.
Michelle Richter-Gordon is co-founder, Annuity Research & Consulting, a Registered Investment Adviser providing advice-only outsourced ERISA annuity evaluative services. Ms. Richter-Gordon believes that financial advisory services are (asset – liability) maximization services, not solely asset-maximization services, and she believes strongly that FINRA should accept her true words while policing accordingly.
1 All assets held in deferred annuities in the US must be annuitizable in order to receive favorable tax treatment. Even if 99% of consumers do not proactively choose to exercise this right, the right to annuitize is meant to be the principal reason why the contract is sold in the first place.
2 Access to this article can be obtained for 24 hours for free by signing up at the link above, which I highly recommend!
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
