What Is a QLAC?
On July 1, 2014, the U.S. Treasury Department and the IRS approved the use of qualified longevity annuity contracts within a 401(k) plan or traditional IRA. It’s important to know what a QLAC is, and how it could possibly benefit your specific situation.
Not all longevity annuities are considered QLACs, even though they are pretty much the same product. The major difference is that a QLAC is recognized by the IRS to allow deferral periods past the required minimum distribution (RMD) age of 70½. With a longevity annuity that doesn’t fall under the QLAC category, most carriers won’t even show you a quote deferring past 70½.
The main reason the QLAC ruling was passed is to help younger workers participating in their employer 401(k) to plan for future lifetime income needs when they eventually retire. A qualified longevity annuity contract is a future lifetime income stream that can be structured to pay you for as long as you live. There are no annual fees, no market growth attachments, and the strategy can be easily explained and understood. So the question is, how can this benefit the baby boomer or retiree?
The QLAC rules dictate that you can only use 25% of your total dollar amount in qualified accounts or $125,000, whichever is less. The other primary stipulation is that you can defer the income start date up to age 85.
Here’s where you need to pay attention, and where boomers and retirees can benefit from the QLAC ruling. For people with traditional IRAs, you will be allowed to lessen the taxes you pay on your required minimum distributions (RMDs) using the QLAC strategy while guaranteeing a lifetime income stream for you (and your spouse, if applicable) starting at a future date. If you are fortunate enough to not really need the income derived from present or future RMDs from your traditional IRA, you can take up to $125,000 out of that annual calculation. Let’s take a look at a specific case of how this QLAC required minimum distribution strategy works with your IRA.
For example, let’s assume you have $500,000 in a traditional IRA: You place $125,000 into a qualified longevity annuity contract and defer the income to start as late as age 85. You don’t have to defer it out that long, but that is the maximum age under the current rules. So when you go to calculate the required minimum distribution (RMD) from your IRA, you will be using $375,000 as the total instead of $500,000. Because it is a lower amount, you will be required to take less money out, which in turn means you would pay less in taxes.
If you die before the income stream is designated to start, then you can structure the QLAC contract so that 100% of the money will go to your listed beneficiary. (Refer to the first part of this article for how you can structure the income payouts.) You can also structure the QLAC policy for joint payment with your spouse, and be able to customize the income stream to reflect your specific planning goals.
As of the date of this article, there are actually no QLAC products available for purchase, and carriers are scrambling to put the needed paperwork and procedures in place to offer the strategy. My prediction is that QLACs will be available by the end of the calendar year, or the first part of 2015. (FCVA: As of October 2014, at least one carrier now offers a QLAC contract.)