IRS Toughens Up Rule On Bank-Issued Annuities

An Internal Revenue Service rule that takes effect Feb. 9 could make bank-issued annuities less attractive to investors.

Under the rule, bank-issued annuities must be paid out over the life of an investor to remain tax deferred. In addition, the IRS barred investors from borrowing against bank-issued annuities.

Annuities issued by insurers have a wider range of distribution options, such as a lump sum on the maturity date. Their customers also may borrow against the value of the annuity.

The IRS said it issued the rule Jan. 8 to clarify that most annuities are debt instruments, which are not entitled to a tax break. Insurer-issued annuities are not affected by the change because they are specifically exempted from the definition of "debt instrument" by the federal tax code.

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