Greetings! I hope this finds you well and enjoying life.
I’ve been getting a lot of questions about the Treasury Department’s recent regulations that create a new type of annuity in the tax law called “Qualifying Longevity Annuity Contracts” (QLACs).
This isn’t really a new type of annuity. This is simply a new tax treatment for types of annuities that already exist (specifically, certain types of deferred annuities) when they are purchased inside tax deferred IRAs or tax-deferred employer sponsored retirement plans.
With a basic deferred lifetime annuity you pay a lump sum premium now (e.g., at age 65) to an insurance company, then starting at a specific age in the future (e.g., age 85) the insurance company begins paying you a specific amount of money every month and they continue to do so for the rest of your life.
In other words, these are much like immediate lifetime annuities, except for the fact that the income doesn’t kick in for many years (hence, “deferred lifetime annuity”). And because the payments don’t kick in for several years, the premium is much lower for a given level of income.
For example, for a 65-year-old female to purchase an immediate lifetime annuity paying $1,000 per month, the premium would be $180,384. In contrast for a 65-year-old female to purchase a deferred lifetime annuity for which payments begin at age 85, paying $1,000 per month the premium would be $24,740.
Generally with a traditional IRA or 401(k) you have to start taking required minimum distributions (RMDs) soon after reaching 72. Thus prior to the new rules, if you purchased a deferred lifetime annuity within a traditional IRA that pays nothing until say age 80 you could have a problem. The annuity is not liquid, so you might end up in a situation in which the liquid IRA balance is not sufficient to satisfy your RMD. Now, this is no longer a concern. Under the new rule as long as the annuity meets the requirements to be a “qualifying longevity annuity contract,” the value of the annuity would not be included in the value of your IRA or 401(k) or other similar accounts when calculating your RMD.
A deferred annuity must meet several requirements to be considered a QLAC. First, payments must start no later than the first day of the month after the month in which you reach age 85. Second, the annuity must not be a variable annuity or “indexed annuity.”
Optional riders that would be allowed include:
- Inflation adjustments.
- Survivor benefits to a designated beneficiary, provided they meet a few specific requirements (e.g., in most cases the benefit to the survivor cannot be greater than the payments that were being made to the original owner)
- A “return of premium” rider wherein upon the death of the original owner the designated beneficiary receives an amount equal to the premiums paid, minus any amount that has been paid out so far.
Finally, there are some dollar limits to be aware of:
- The total premium(s) paid for your QLAC(s) must not exceed $125,000
- The total premium(s) paid for your QLAC(s) in IRAs (not including annuities in Roth IRAs) cannot exceed 25% of your total IRA balances (not including Roth IRAs), with IRA balances being measured as of 12/31 of the prior calendar year
- The total premium(s) paid for QLAC(s) in an employer sponsored retirement plan cannot exceed 25% of your account balance in that plan.
Allowing for a retirement income situation when longevity is likely and a good bet a QLAC can be a wise financial tool to consider.
If you have questions or comments about the above or feel that we can help with your retirement in any way, don’t hesitate to call.
Jeff Christian CFP, CRPC
“We are not human beings on a spiritual journey. We are spiritual beings on a human journey.”