RETIREMENT INCOME PLANNING
QUALIFIED LONGEVITY ANNUITY CONTRACTS/ QLACs
Deferred income annuities provide a way to ensure lifelong income. The QLAC rules allow these annuities to be purchased with qualified retirement funds. A QLAC is a qualified version of a deferred income annuity, funded with dollars from an IRA or an employer plan, that enables the owner to defer a portion of his or her required distributions—and taxes—until a date beyond age 73. Funds that would otherwise be forced into a distribution mode and taxed beginning at age 73 can now be directed into a QLAC—a deferred income annuity—that can begin payouts after age 73 without violating the RMD rules. Essentially, the owner is converting some of his or her qualified retirement savings into guaranteed income.
Over the past few years, much effort has been put into encouraging consumers to maximize their qualified retirement savings and to increase the likelihood that those savings will last throughout their lives. On the private side, we’ve seen innovative product offerings such as deferred income annuities. On the public side—the policymaking side—lawmakers recognized the fundamental conflict that exists between deferred income payout options for qualified funds and the required distribution rules. They saw the RMD rules as an impediment to qualified arrangements under which individuals can purchase deferred annuities that begin at an advanced age.
Thus, they issued new rules that allow certain qualified plans and IRAs to purchase and hold qualified longevity annuity contracts within the plan and exclude the value of those contracts from the plan’s account balance used to determine required minimum distributions. This will lower the amount the participant is required to take every year. And the lower the distribution, the lower the income tax.
The current maximum that can be deferred in a QLAC is $200,000 and the payments must start by age 85. The ability to access the cash instead of the income is very limited and the payout rate must be carefully reviewed before committing funds to this option.
