New laws and regulations make it easier to convert your 401(k) into guaranteed lifetime income.
Longevity annuities don’t start paying income until you’re 80 or 85. Previous rules didn’t allow them in retirement plans, because you had to begin taking distributions after age 70½. The Treasury Department recently issued new rules that say the RMD rules won’t apply to up to 25% of a retirement account, up to $100,000, used to purchase an annuity that begins by age 85.
The Treasury issued rules that make it easier for retirement plans to calculate a partial annuity. These should make it easier to take part of a retirement plan as an annuity and part as a lump sum.
While considering your employer retirement plans, don’t overlook the new Roth 401(k) plans many employers now are offering. Like Roth IRAs, they don’t offer upfront tax benefits. You make deferrals to the plans with after-tax money. But investment returns compound tax-free, and distributions are tax free.
Higher income workers especially should consider Roth 401(k)s, because unlike Roth IRAs there are no income limits for contributions.
Someone age 50 or older can defer up to $22,500 to a Roth 401(k) in 2012.
Another reason to consider a Roth 401(k) is that your tax bracket might be higher in retirement. If so, it makes sense to pay the taxes now rather than later.
RW March 2012
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