Climbing the Financial Peaks: Unveiling the Power of Registered Index Linked Annuities (RILAs)

Korey Knepper |

Annuities often spark debates in financial circles, balancing between their potential benefits and their suitability for each individual's financial plan. It's crucial to acknowledge that not all annuities are cut from the same cloth. In my view, the majority—over 90%—of available annuities fall below par. However, among them, a few stand out depending on the context. One such standout is the Registered Index Linked Annuity, abbreviated as RILA.

But what exactly sets a RILA apart, and how does it distinguish itself from its annuity counterparts? A RILA operates on a different mechanism in several key aspects. Firstly, it's directly linked to an index like the S&P 500, Russell 2000, or MSCI EAFE, unlike fixed annuities which offer a set percentage return or variable annuities that are tied to underlying investments. While equity-indexed annuities provide a similar option, many of these products impose low caps and high floors, primarily aimed at guarding against losses. Initially, RILAs resembled these closely, but recent trends show that annuity companies have been adjusting the caps on this product. Based on my analysis across four different companies, over the past couple of years, the caps have surged on average by a staggering 853%, with some even going uncapped. This surge has been paired with maintaining a 20% buffer.

What does this mean for investors? It implies that they can inject a lump sum into a RILA and capture 100% of the market's gains while being protected from the initial 20% of losses. For instance, let's say we invest $100,000 in a RILA tied to the S&P 500 index with a 20% buffer over a six-year term. Even during downturns akin to the S&P 500's worst six-year period (-15.2%), the buffer covers all market losses. In a more severe scenario, like a 25% decline, the buffer mitigates the first 20% of losses, leaving the product down by only 5% over that period. Conversely, in a bullish market with a total return of 200% over the six-year term, all gains are uncapped, resulting in a $300,000 investment. Moreover, opting for a product with a participation rate exceeding 100%, such as 110%, would yield gains 10% higher. For instance, a 200% market rise translates to a 220% gain, equating to an additional $20,000 profit.

However, there's a caveat—the six-year term. To avoid surrender charges, the initial investment must stay in the product for at least six years. This constraint means the product isn't suitable for those prioritizing liquidity. Nevertheless, many RILAs come without fees beyond the surrender charges. Essentially, this product doesn't incur immediate financial costs but demands a time commitment.

Where does this product shine? One notable application is leveraging an in-service withdrawal from a 401(k) for individuals aged over 50. This circumvents triggering a taxable event, as the product is purchased as an IRA. RILAs can also prove advantageous for Roth IRAs, particularly for individuals who won't reach age 59 ½ during the six-year term. Additionally, RILAs can bolster an investment portfolio's overall protection, allowing for more aggressive investments in other sectors.

If you're keen on delving deeper into this product, feel free to schedule a call using the provided link. As always, thank you for your interest!


Disclosure: An annuity is a long-term investment designed for retirement purposes. With a RILA, there is a risk of loss of principal if negative index returns exceed the selected protection level. Gains or losses are assessed at the end of each term. With a registered annuity, investment returns and the principal value of an investment will fluctuate so that an investor's units, when redeemed, may be worth more or less than the original investment. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity.  Annuities contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Investors are cautioned to carefully review an annuity for its features, costs, risks and how the variables are calculated.