Last summer, the Treasury Department introduced tax rules for a special financial tool known as a Qualified Longevity Annuity Contract (QLAC).
QLAC refers to annuities purchased as part of a qualified retirement plan. The longevity part indicates that these are long-term tools that follow owners well into their golden years.
Buyers can put off payouts until they are older, delaying distributions as late as age 85. This gives a buffer for accepting Required Minimum Distributions (RMDs), which would typically be required starting at the age of 70 ½.
The Treasury department made the move after evaluating how people use defined contribution plans—which are swiftly surpassing defined benefit plans in popularity—and whether RMDs inhibit use of annuities.
The new rules increase the use and benefits of deferred annuities, giving Americans more options for stable, long-term, tax-incentivized income.
Insurance companies are just starting to add the product to their plan offerings.
The Setup for QLACs
QLACs are a type of annuity providing deferred fixed income, meaning payments are delayed until later in life and the amount of payout is a set sum. It functions differently than other annuities, which may be variable or equity-indexed. QLAC payments don’t fluctuate in value.
The premise for using QLACs is simple: people take money from plans like 401(k)s and IRAs and roll over savings into the special tax-advantaged tool.
The rules allow qualified plan holders to move the lesser of either $125,000 of savings or 25 percent or retirement assets into QLACs. QLAC holders will be able to deduct annuity premiums from RMD calculations. For some, the deduction will reduce taxes.
The limits are based on different factors based on plans. For example, people cannot invest more than 25 percent of all balances from SEP and SIMPLE IRAS. If people have employer-sponsored plans, like 401(k)s, 403(b)s and 457(b)s, the percentage will be based on up to 25 percent of the account per plan.
Roth IRA and Roth conversions do not allow QLACs.
Before the ruling, people purchasing deferred income annuities faced restrictions that could result in decreasing the value of certain retirement assets. For example, people with IRA annuities might have to begin taking payments from annuities once they reached the RMD age, which could result in a lower income stream.
How Investors Benefit from QLACs
Pre-retirees may be able add QLACs to financial plans and take advantage of unique benefits. As they evaluate their portfolios, examining employer-offered plans, stock holdings, annuity options, life insurance policies and other retirement accounts, they can determine whether QLACs will help achieve savings goals.
Here is a brief summary of the primary benefits of QLACs:
- Lowering RMDs
- Deferring income taxes
- Fixed payment restriction prevents annuity from decreasing due to market lows
- Generous ratio of benefits to premium cost
- QLAC RMDs can be delayed until age 85
- No annual fees
- Premium can be indexed to adjust for inflation
- Death benefit goes to beneficiaries rather than annuity carrier
- Guaranteed lifetime income
Retirement planners in both IRA and DC parties should consider how using a QLAC fits with their current plans and how the option would impact the timing of accepting Social Security income.
Who’s Buying In?
Industry experts predict that IRA owners will be the first to start investing in QLACs because the process for converting IRA funds to QLACs is streamlined. Also, insurance companies are beginning with adapting IRA products to be eligible for QLACS.
Eventually employers offering DC plans like 401(k)s may jump on the QLAC bandwagon.
Meanwhile, insurance companies are beginning to advertise these new products. American General Life Insurance and the Principal Financial Group recently have already said they’ll be offering QLACs.
Alanna Ritchie has spent years studying, writing and learning to love the intricacies of the English language. Today, she works as a content writer for Annuity.org, where her primary focus is personal wealth management.
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