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Tax Breaks with Advanced Life Deferred Annuities (ALDAs)

The Department of Treasury recently made it much easier for people to buy long-dated deferred income annuities, which are also known as longevity insurance or advanced life deferred annuities (ALDAs).

The new regulations mean, for instance, that if you use tax-deferred assets to buy an ALDA at age 60 that will pay out an income if and when you reach age 85, you don’t have to count those assets when you calculate how much you must withdraw from your tax-deferred accounts as annual required minimum distributions (starting at age 70½).

Great news, right? Maybe. It remains to be seen whether the rule change will spark interest in this interesting product. So far, demand has been low. But, in my opinion, ALDAs are the perfect antidote to certain types of financial insomnia.

Here’s the ALDA story. Let’s say you’re 60 years old, you have $500,000 in savings, and you’ve inherited dynamite genes (with long telomeres). You could take $32,000 of that half-million and buy an ALDA that pays you $2,000 a month starting at age 85. If you died before then, you’d get nothing.

Why make that bet? Because you could spend your remaining $468,000 in savings without the anxiety about outlasting your money that plagues many retirees. Many people—including people with ample savings—clip coupons and skip vacations during retirement because they’re hoarding their money against the possibility that they might live to 100.

An ALDA takes that problem off the table, without requiring you to surrender control over a large percentage of your savings. It may even be cheaper in the long run than buying a variable annuity with a living benefit guarantee and paying a 1% fee each year for the rider.

Like the idea, but can’t tolerate the thought of forfeiting the $32,000 due to an early demise? Then buy an ALDA with a death benefit. In that case, however, the upfront cost would be almost double—$63,000 for $2,000 a month at age 85, according to one quote—and you would have to count those assets toward your RMD. Uncle Sam won’t let you have it both ways.

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