More needs to be done to encourage people to save for retirement, according to Robert Klein, founder of Retirement Income Center in Newport Beach, Calif.
To do that, Klein, a financial advisor, has proposed providing a tax credit for people buying deferred income annuities. The deferred income annuities would be required to be purchased with nonqualified money. This would enable purchasers to qualify for the tax credit and would allow income distributions to receive favorable tax treatment.
Current political events make it a perfect time for such a program to be enacted by Congress and signed by the president, Klein said. 401(k) plans are not fully taking the place of private pension plans, there is a lack of long-term care planning, the sustainability of Social Security is questionable and tax reform is already a hot topic.
Those factors point to “a perfect storm” to discuss new proposals for retirement savings and for creating lifetime payments in retirement, he said. Klein is proposing a tax credit longevity annuity plan (TCLAP), which would be similar to a qualifying longevity annuity contract (QLAC).
“Many people think 401(k) plans are pensions, but they are not. They are simply savings plans and will not provide lifetime payments,” he said. Because his plan includes a tax credit to encourage saving, it would require approval by Congress and the president. Klein has reached out to members of Congress about his proposal.
“QLACs represent a good effort by Congress to encourage retirement savings, but the kicker is that the money coming out is taxable and there is a $125,000 limit on the money that can be used to purchase the annuity,” he said.
Klein has offered specifics for his tax credit annuity plan, but he said the specifics actually would be up to Congress.
Under Klein’s plan, after-tax money would be used to make the annuity purchase, but a tax credit would be given equivalent to 8 percent of the initial and subsequent purchases if the person is not part of a 401(k) or other qualified retirement plan. The credit would be 4 percent for those who are part of a qualified plan.
“I would propose a purchase limit of $100,000 in the initial contribution year and $50,000 in subsequent years with a lifetime limit of $750,000. This would result in a maximum investment tax credit of $8,000 or $4,000 in the initial year and $4,000 or $2,000 in subsequent years, depending on the purchaser’s participation in a qualified retirement plan," Klein said.
Another key feature would be the ability to withdraw funds to use for long-term care protection prior to the lifetime income start date. Up to $5,000 a month could be used for long-term care with a lifetime limit of 125 percent of the cumulative purchase amount.