Proposed law would help retirees keep the tax collector away

New Haven Register
Maria Garriga, Register Staff
October 4, 2004

Annuities could become an attractive option for retirement savings if Congress passes The Retirement Security for Life Act this year.

Connecticut U.S. Rep. Nancy Johnson, R-5, introduced the legislation in July to give baby boomers added incentive to save by reducing taxes on annuity income.

An annuity is a contract purchased from an insurance company that promises payments to the annuity buyer after retirement - until death or until a fixed period after retirement.

The Retirement Security for Life Act would shield up to $20,000 of annuity income from taxes.

"The urgent problem is that we need to do more to ensure that baby boomers don't have to sell their homes after retirement or work at part-time jobs. The bill helps ensure retirement security for middle class families by helping them turn a lifetime of savings into a lifetime of income," said Brian Schubert, Johnson's spokesman.

Americans have stashed away $5 trillion in tax-deferred retirement savings plans, but longer life spans and rising prices could mean some will outlive their savings.

The bill was introduced July 20 and has bipartisan support in the House Ways and Means Committee, which handles tax laws for Congress.

Schubert said he does not expect any action on the bill until after the November elections, but he expects rapid approval afterward.

"The bill is a common sense idea that has bipartisan support," Schubert said.

With more than 70 million baby boomers approaching retirement age, the federal government expects that some may outlive their retirement savings and wants to start giving more incentives to save in vehicles that offer permanent income - such as annuities.

"They act like Social Security checks - the check comes every month," Schubert said.

Schubert said the legislation will give middle-class Americans more incentive to add annuities as a complement to their pensions, 401(k) plans and Individual Retirement Accounts.

Financial planners say it could give the annuities market a much-needed boost.

Although annuities offer the attractive option of payments for life, payment from annuities are subject to income tax, while Individual Retirement Accounts, 401(k) plans and even capital gains offer more shelter from taxes.

That's why many financial planners steer away from them.

But if Johnson's bill becomes law, annuities could attract more attention from financial planners.

"We are not generally recommending them because annuities have a lot of hidden costs and you can get the same benefits elsewhere," said Robert P. Kreitler, a certified financial planner based in New Haven .

The fees include management fees and cancellation fees.

Kreitler thinks the new law could give annuities the tax advantages planners like.

"We would be more likely to look at them," he said.

Annuities can be purchased to deliver a specific rate of return, called "fixed annuities," or to have a return linked to market performance, called "variable annuities."

The American Council of Life Insurers estimates that life insurers hold variable annuity contracts totaling $918 billion.