SPIA on steroids, Pt. 2Article added by Joe Bellersen on October 20, 2009
Joseph Bellersen

Joe Bellersen

Joined: August 21, 2010

On June 8, 2009, Rep. Earl Pomeroy [D, ND] along with Rep. Virginia Brown-Waite [R, FL] introduced H.R. 2748, The Retirement Security Needs Lifetime Pay Act of 2009. This bill proposes to exclude a portion of such lifetime annuity payments from current income tax. In my previous article, I highlighted some of the proposed changes in The Security Needs Lifetime Pay Act of 2009. These changes allow for substantial benefits in lifetime-based SPIAs. In addition, this bill proposes a substantial incentive for individuals to utilize lifetime annuities in certain qualified plans.

Far reaching implications

The proposed legislation would have real impact upon retirement planing with the emphasis upon the key operative word: "income." The legislation provides for exclusions "under any qualified retirement plan (as defined in section 4974(c)), or any eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A)."

While the bill allows for a 50 percent exclusion for personally owned and converted SPIA income, as discussed in the previous article, there is a limitation to 25 percent or maximum of $5,000 for the qualified distributions. If married, the amount is doubled to a dollar limitation of $10,000. This results in much greater spendable income for a retiree or retiree and spouse.

The plans identified in IRC §4974(c) are:
    "(c) Qualified retirement plan
    For purposes of this section, the term "qualified retirement plan" means: (1) a plan described in section 401 (a), which includes a trust exempt from tax under section 501 (a)

    (2) an annuity plan described in section 403 (a)

    (3) an annuity contract described in section 403 (b)

    (4) an individual retirement account described in section 408 (a), or

    (5) an individual retirement annuity described in section 408 (b). Such term includes any plan, contract, account, or annuity which, at any time, has been determined by the Secretary to be such a plan, contract, account, or annuity." 1
The bill goes further to include "eligible deferred compensation plans" which would bring all governmental plans of this type into the span of those being eligible. There would be far reaching implications for all retirees who would seek to take advantage of these provisions in this bill.

Clear signal to favor SPIAs for retirement

The significance of this change cannot be overlooked. The proposed legislation providing for exclusions for certain qualifying retirement accounts is a game changer. This new approach sends s a clear signal:

"We want you to insure your future retirement income."

This major shift in approach could redefine retirement planning for a large population segment. The incentive to encourage lifetime annuity benefits is un-mistaken. A single individual whose taxable income from qualified accounts was $20,000, would receive a maximum exclusion of 25 percent or $5,000.

Key exception for defined benefit plans

There is an exception against the availability of the exclusion to defined benefit (DB) plan annuities. This exception is certain to garner significant scrutiny and much controversy, as it would effectively undermine current DB plans that do not provide for lump-sum distributions. In addition, many more participants in DB plans allowing lump-sum distributions would potentially be motivated to retire earlier than planned just to take advantage of a lump-sum distribution which could then be rolled over to an IRA rollover account. Once in the IRA rollover account, the participant merely needs to acquire a lifetime annuity contract and reap the additional benefit in the form of the tax savings. This ultimately serves to conflict with the fundamental purpose of DB plans, which provide for a replacement income.

While I agree that there is a need to promote lifetime annuitization, I do not believe it should be at the expense of DB plans generally.


Generally, all distributions from qualified plan accounts are fully taxed as received. Life expectancy is generally considered only in determining minimum distributions from qualified account balance plans. While many retirees want to defer distributions for as long as possible, taxation must begin at some point under the law. In order to assure that the general public take note of the merits of annuitization, longevity and longevity risks, this bill would bring much needed focus to the matter. We illustrate an individual situation to provide an idea of a potential result:

Qualified distributionsCurrent lawProposed law
Annuity income$20,000$20,000
Excluded portion$0$5,000
Taxable portion$20,000$15,000
Tax amount @ 34 percent/
(100 percent*34 percent)
Net after tax$13,200$14,900
Non taxable portion$0$5,000
Net spendable income$13,200$14,900
Increase in spendable income $$0$1,700
Increase in spendable income percent0 percent12.9 percent


The amount of income from a SPIA, when utilized as the qualified plan distribution, would be adjusted by the permitted exclusion amount. This substantially increases spendable income by 12.9 percent in our example, and promotes the embedded value of a lifetime SPIA. The advantage of tax exclusion would promote a social benefit in drawing more attention to the privatization of secure retirement incomes.


The interest of retirees is of utmost importance in the proposed bill. Of secondary interest should be the need to provide a legacy account for beneficiaries.


As boomers retire, the security of their income is the most practical way to minimize the ramifications to changes in Social Security. The far reaching implications of the bill's provisions would create an identifiable mass of boomers who will have much less dependency upon the social systems and resources of the country. It would, in effect, allow for an easier argument toward privatization of Social Security.


Lifetime SPIAs cannot be replaced by any other mechanism. It will always be possible that some boomers and retirees will continue to build wealth during retirement, a time when distributions will provide for the needs of most. SPIAs are longevity insurance. It is common public policy to provide tax incentives to promote socioeconomic objectives. The bill presents just such an opportunity.

Get informed. Stay tuned.


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