Annuity Income Tax Break Bill Introduced

Arthur D. Postal

National Underwriter

Dec. 13, 2004

Legislation has been introduced in the Senate that would reduce by half the tax on the income generated by annuities that make lifetime payments.

The legislation, which will be reintroduced in the next Congress in January, is designed to ensure that existing retirement income products have a seat at the table when Social Security revamping is discussed next year.

The bill was introduced by Sen. Gordon Smith, R-Ore., and Sen. Kent Conrad, D-N.D., on Dec. 7. A similar bill was introduced in the House much earlier in the legislative year by Rep. Nancy Johnson, R-Conn. It has a number of sponsors on both sides of the aisle, particularly from House Ways and Means Committee members, according to officials at the Americans for Secure Retirement trade group.

Under the proposal, individuals would not pay federal taxes on one-half of the income generated by annuities that make lifetime payments. There would be an annual limit of $20,000 on the amount an individual could exclude from federal taxes each year. For a typical American in the 25% tax bracket, this would provide an annual tax savings of up to $5,000, representatives of ASR said.

In a floor statement about the bill, Conrad said the bill would apply only to life-contingent, nonqualified annuities. A life-contingent annuity that is subsequently modified to a fixed-term payout would be subject to a recapture tax, he said.
"Baby boomers represent an unprecedented challenge to our retirement security policies," Conrad said. "They should have a wide range of options available for responsible retirement planning. Our proposal focuses on nonqualified annuities because it is important to have this option considered as part of the larger retirement income security debate that Congress should have before baby boomers begin retiring in large numbers. Options for making qualified plans more secure should be part of that debate as well."

Jack Dolan, a spokesman for the American Council of Life Insurers, said the decision to introduce the bill "illustrates the growing recognition of the need to address America ’s long-term savings and planning crisis." He added that "Congress should encourage people to seek a new source of income that cannot be outlived."

Shannon Hunt , a spokesperson for Americans for Secure Retirement, said Smith and Conrad introduced the bill in the final days of the 108th Congress to establish a clear priority for attention by the 109th Congress.

"With Social Security and pension reform sure to be a major focus in the next Congress, it is critical that lawmakers address the need for consumers to have better options for better managing their savings," Hunt said. "It’s a critical part of the equation that cannot be left out.

"Annuities are the only retirement vehicle that retirees cannot outlive," she added.