Annuity Tax Break Introduced on Capitol Hill

July 20, 2004 ( - A bipartisan group of US lawmakers has introduced a Congressional measure that would give Americans a tax break for investing in annuities that provide guaranteed lifetime income.

Under the  Retirement Security for Life Act of 2004 , individuals would not pay federal taxes on one-half of the income generated by annuities with an annual limit of $20,000 on the annual 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, according to a news release.

The group of sponsors, Representatives Nancy Johnson (R-Connecticut), John Tanner (D-Tennessee), Philip English (R-Pennsylvania) and Stephanie Tubbs Jones (D-Ohio), said their proposal gives Americans more control over their retirement.

Education Campaign

Meanwhile, Americans for Secure Retirement, a newly formed coalition, launched  a new web site  and advertising campaign to educate Americans about the emerging retirement crisis and to drum up support for the legislation. “There are two sides to retirement security,” said former Oklahoma Governor Frank Keating, president and CEO of the American Council of Life Insurers, a coalition member. “Having enough savings is critical, but that’s only half the battle. Retirees must manage their savings so they’ll still have a decent standard of living when they’re in their 90s or older.”

According to the news release, groups who traditionally have not had access to adequate pension coverage are especially at risk. They include women, farmers, the self-employed, part- time workers, employees of small firms, and minorities, many of whom are middle-income.

Dissenting Opinion

Also Tuesday, one trade group came out against the bill, saying that annuity tax breaks should not be restricted to those purchased by individuals outside their employer’s qualified retirement plan. “ We are very concerned the proposal will have a negative impact on small business retirement plan coverage unless it is modified to cover annuities from qualified retirement plans as well,” said Brian Graff, executive director of the American Society of Pension Actuaries Actuaries(ASPA)  in a statement. “It is challenging enough to convince small business owners to adopt qualified retirement plans for themselves and their workers with all the ERISA requirements involved. A special tax incentive for only nonqualified annuities will make it even more challenging, given that many small business owners could actually fair better with the new tax-favored nonqualified annuity.”

>In a news release, ASPA cited the following ” real-life rather typical example” to illustrate the impact on small business owners:

“Assume a small business with two owners age 50 and 13 employees.   In order for both of the owners to save the maximum annual amount allowed in their qualified retirement plan each owner contributes $41,000 on his own behalf.   They contribute another $34,751 on behalf of their 13 employees in order to satisfy the qualified retirement plan nondiscrimination rules.   Annual plan administration costs total $2,000 for a total retirement plan cost of $118,751.

Now, compare the yields available to these owners if they use that amount to each purchase an individual nonqualified deferred annuity rather than establishing and contributing to a qualified retirement plan.   Assuming an 8% annual rate of return, 40% combined tax rate, and a normal retirement age of 65, the owners will earn an after-tax lifetime annuity monthly payment of $7,834 if the contribution is invested in a nonqualified annuity.   The after-tax monthly yield for a lifetime payment from contributions to a qualified plan totals only $6,296.   Multiply the $1,538 differential by 12 months per year and you see that choosing a qualified retirement plan would reduce each retirement benefit by $18,456 per year, or $276,840 over 15 years, assuming the owner lives till age 80.”

Coalition Support

The members of the coalition supporting the initiative include: American Agriculture Movement of Arkansas, American Agri-Women, American Corn Growers Association, American Council of Life Insurers, Citizens Against Government Waste, Committee of Annuity Insurers, Financial Services Roundtable, Hispanic Business Roundtable, National Association for Variable Annuities, National Consumers League, National Taxpayers Union, Small Business Survival Committee, Soybean Producers of America, The Latino Coalition, U.S. Chamber of Commerce, Women Entrepreneurs, Inc., and Women’s Institute for a Secure Retirement.