Mar 15, 2017

One Way to Guarantee Lifelong Income

By Heather Kelly

Almost a year ago, I wrote an article about Qualified Longevity Annuity Contracts, or QLAC. At the time, there were very few QLAC products on the market and for that reason and others, I was not particularly a fan of their use for our clients.

However, things have changed dramatically in the intervening year. There are now far more QLAC products on the market that offer better rates at lower costs. As such, I am now in favor of their use for clients who are interested in QLACs and who would benefit from them.

For those reasons, I also thought it would be a good idea to revisit the subject and update the article I wrote last year.

Required Minimum Distributions (RMD)

We are in the middle of tax season. If you haven’t already filed your 2016 returns, no doubt you are involved in assembling your tax information to make sure you meet the IRS deadline for filing on April 18.

For some people, this preparation might include a visit to a CPA or financial adviser to discuss advantageous tax strategies, and how those strategies might effectively reduce the amount of taxes they owe to the government.

For people who have reached the age of age 70 ½, this subject is of special concern. Why? Beginning at that age, people are required to annually withdraw a certain amount of money from their IRA, SIMPLE IRA, SEP IRA, or other qualified retirement plan accounts. This directive from the IRS is known as a Required Minimum Distribution (RMD).

The IRS has decided that individuals cannot keep retirement funds in their accounts indefinitely. The RMD mandates that they must withdraw a certain amount of money from their retirement accounts every year. Why? Because the money that is withdrawn is considered to be taxable income and individuals will have to pay taxes on the amount of money that is withdrawn.

Whether you need or want to withdraw money from your retirement account is not an issue. At age 70 ½, you must begin to withdraw a certain amount from your retirement account in order to comply with the RMD regulation.

However, the IRS does provide a way to defer paying taxes on a portion of the money that is withdrawn from your retirement account. IRS rules permit taking some of the funds from your IRA* and putting them into a Qualified Longevity Annuity Contract, or QLAC.

* The premium amount is subject to two limitations: 1. Total sum of QLAC premiums cannot exceed $125,000 regardless of funding source; and 2. QLAC premiums from a given funding source cannot exceed 25% of that funding source’s value.

What is a QLAC?

As people grow older, one of their biggest fears is outliving their retirement savings. QLACs are deferred income annuity contracts that help address this issue. A QLAC is essentially an investment vehicle that guarantees that funds from qualified retirement plans can be turned into lifetime income*.

The main feature of a QLAC is that it allows you to shift your income from now into the future. The fundamental feature of this insurance product is that it comes with an annuity guarantee to help ensure you’ll have at least some income later in life, no matter how long you live. It could even come with a joint provision for your spouse.

As long as the QLAC meets the requirements as determined by the IRS, it is exempt from the RMD rules until payouts are initiated after the specified annuity starting date.

* Guarantees are subject to the claims-paying ability of the issuing insurance company.


QLAC Rules

First, the income from the QLAC must begin from age 70 ½ to age 85. The QLAC income stream can begin at, for example, age 75, or perhaps at age 80. But the income stream must absolutely begin by age 85.

Furthermore, all of your IRA cannot be put into a QLAC. The maximum total QLAC premiums from all sources cannot exceed the lesser of $125,000, or 25% of your traditional (non-inherited) IRAs value.

The potential benefits of a QLAC come with some tradeoffs. Since funds from a QLAC cannot be withdrawn (other than your guaranteed annual income), you will need other income sources as well. These could include your RMDs from your remaining IRA assets, Social Security, or perhaps a pension from an employer.

One of the primary advantages that a QLAC offers is that it transfers the risk of outliving your assets – not to mention market and interest rate risk – to the insurance company.

Is a QLAC Right for Me?

Like any IRA distribution, the income from a QLAC is taxable income. It is a fixed annuity – though some insurance carriers offer inflation-indexed payments – so you cannot invest it as you might with a variable annuity. It is designed for people whose greater concern is income later in life who don’t need all of their RMDs at age 70 ½. If you do need all your RMDs for living expenses, then a QLAC may not be right for you.

For example, we are finding that people who have $500,000 or less in their retirement accounts are likely to need their RMDs for ongoing living expenses. For people who have a million dollars or more of qualified retirement assets, a QLAC may not provide them with any significant tax incentives. However, for people with assets between $500,000 and $1,000,000, they are most likely to be interested in, and may benefit from, the QLAC option.

Finally, you can also assign a beneficiary to your income guarantee (though the payment amount may be diminished depending on actuarial calculations). And if you die before your life expectancy is reached, the premiums that haven’t yet been returned to you could be paid as a lump sum to your heirs or estate.

Overall, the QLAC is one possible tool to shift longevity risk from you to an insurer. It offers some potentially attractive benefits, but it comes with special rules and tradeoffs.

As such, you should speak with a qualified tax professional before establishing a QLAC.

Guarantees are subject to the claims-paying ability of the issuing insurance company. Deferred income annuity contracts are irrevocable, have no cash surrender value and no withdrawals are permitted. Purchasing a QLAC solely to reduce one’s Minimum Required Distribution (MRD) is a tax decision that may not be appropriate for everyone. Consult an attorney or tax professional regarding your specific situation. QLACs cannot be purchased with Roth or Inherited IRA dollars; value of such IRAs cannot be included in determining 25% premium limit. If you previously purchased a QLAC, the calculation of your 25% limit is more complicated. Please contact an attorney or tax professional for additional details. United Capital does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. United Capital cannot guarantee that the information herein is accurate, complete, or timely. United Capital makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation. Fixed annuities available at UCRM are issued by third-party insurance companies, which are not affiliated with any United Capital. United Capital Risk Management, LLC (UCRM) makes recommendations based on the specific needs and circumstances of each client. UCRM does not provide legal, accounting or tax advice. Investors should consult their tax professional with questions about their particular circumstances. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this document. UCRM is an insurance agency and a subsidiary of United Capital Financial Advisers, LLC (United Capital). Life insurance products are not a deposit, not FDIC-Insured, not insured by any federal governmental agency, not guaranteed by any bank or credit union, and may go down in value.

United Capital Financial Advisers, LLC (United Capital) provides financial guidance and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, United Capital has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this blog is intended for information only, is not a recommendation, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. This blog is a sponsored blog created or supported by United Capital and its employees, organization or group of organizations. This blog does not accept any form of advertising, sponsorship, or paid insertions. Certain authors of our blog posts may be influenced by their background, occupation, religion, political affiliation or experience. It is important to note that the views and opinions expressed on this blog are that of the owner, and not necessarily United Capital Financial Advisers. As a Registered Investment Adviser, United Capital does not allow any testimonials on their blog, and any comments deemed as such United Capital will remove.

United Capital does not offer tax or legal advice; therefore all articles should not be taken as such. Please consult legal or tax professionals for specific information regarding your individual situation. All referenced entities in this site are separate and unrelated to United Capital. Any references to any specific commercial product, process, or service, or the use of any trade, firm or corporation name is for the information and convenience of the public, and does not constitute endorsement, recommendation, or favoring by United Capital.