ments) will fund essential needs, then
the chief outstanding issue is determining an appropriate withdrawal rate
on the balance of retirement assets to
ensure that basic living expenses are
covered until the DIA kicks in.
For the tax-wise, say experts,
another key consideration is the DIA’s
tax-efficiency. Unlike traditional deferred annuities, which require distribution first of taxable gains, and then
the non-taxable principal (last in, first
out or LIFO), the DIA pays principal
and gain in tandem. Cloke dubs the
tax treatment “first-in, blended-out”
or FIBO.
“The DIA’s tax treatment results in
higher cash flow
and lower income
tax than other
annuities,” says
Cloke. “This can be
especially attrac-
tive to affluent
clients who, absent
the DIA’s ability to
minimize taxable
income, might view
an annuity as un-
necessary. That’s
why we say the product is ‘good for
“Fixed indexed and variable an-
nuities can’t match the DIA’s high
exclusion ratio [of taxable to non-
taxable income],” adds Rao Garuda, a
principal of First Financial Resources,
Columbus, Ohio. “If you defer distribu-
tions by 10 years, then about half of
income could be tax-free for 10 years.
That’s significant.”
For the high net worth, the prod-
uct’s tax-favored treatment is ex-
pected to yield still more benefits in
coming years. The 2010 health care
reform law calls for the levying in
2013 of a 3.8% tax on net investment
income and a 0.9% Medicare tax on
earned income for individuals whose
taxable income exceeds $200,000
(single filing), or $250,000 (joint filing).
Cloke observes that clients with high
incomes can potentially avoid the
Medicare taxes by shifting part of their
retirement income into a DIA.
Garuda notes also that DIA policyholders may be able to reduce Part
B Medicare premiums under the
health care reform law. The legislation will require 14% of seniors
with incomes over $85,000 a year
($170,000 for couples) to pay higher
“income-related” premiums, up
from 5% currently.
Still another tax advantage is the
client’s ability to minimize income tax
by using the DIA to meet the IRS’ re-
of income. Additional buckets in the
ladder (each offering greater equity
market exposure than the last) can
include: ( 3) a five-year variable annuity
with an optional guaranteed minimum
income benefit; ( 4) high dividend-pay-
ing blue chip stocks; and/or ( 5) a cash
value life insurance policy carrying a
long-term care rider.
“I DON’T LIKE PRODUCTS THAT INSURE AGAINST
MUTUALLY CONTRADICTORY OUTCOMES: DYING
TOO SOON OR LIVING TOO LONG. IN MY BOOK,
THAT MEANS THAT YOU’VE MADE TWO BETS AND
ARE GUARANTEED TO LOSE ONE OF THEM.”
—JOHN OLSEN
quired minimum distributions (RMDs)
rules, which mandate that seniors
begin RMDs on qualified individual
retirement accounts by age 70½.
Says Cloke: “If you annuitize quali-
fied dollars over a lifetime with a life
contingent DIA, then you satisfy RMD
requirements.”
For all of the DIA’s advantages, the
solution is not a retirement income
panacea. The product, market-
watchers agree, is but one of several
vehicles that should be incorporated
into an overall plan. In a typical an-
nuity laddering strategy, for example,
the client will kick-start retirement
distributions at age 65 using a SPIA
with a 5-year payout.
The second retirement “bucket,”
the DIA, will provide another 5 years
impact other products in the portfolio.
