Qualified longevity annuity contracts (QLACs) are popular retirement vehicles for those who want to create a deferred income stream later in life using pre-tax dollars.
Longevity contracts were approved by the IRS in June of 2014 and offer very attractive tax reduction strategies.
Many institutions offer these plans, but insurance companies are uniquely suited to offer them as they have always specialized in deferred income planning.
With fewer employers offering pensions, the need for guaranteed retirement income using safe and insured investments has grown. A QLAC can be the answer for individuals and groups who wish to earmark qualified funds to create a future income stream.
There are several advantages to deferred annuities including: Required Minimum Distribution reductions, lower taxes, additional time for tax-deferred growth, future income streams and simplicity.
Many investors like QLACs as they simply lower taxable income from RMDs at age 70 1/2 or 72 – depending on which applies. Your invested funds will postpone RMD withdrawals for years and allow for additional compounding tax-deferred growth. Distributions are then withdrawn later when needed or when taxable income is less.
For example: If you have $540,000 (or more) of IRA funds, you can invest up to $135,000 in a QLAC. Income payments could be deferred up to age 85. (The remaining $405,000 (or more) would be subject to RMDs in your 70’s.) In this scenario, RMDs are deferred for nearly 15 years on a substantial portion of IRA funds reducing taxable income while also taking advantage of additional tax-deferred growth.
Additionally, deferred income annuities establish a large (sometimes increasing) income stream later in life. More people are working past their 60’s and into their 70’s. It’s beneficial for some to postpone taxable RMDs until they are needed. This allows for additional time to grow your investment and a guaranteed income past your working years.
QLACs are popular because there are very few moving parts. Only fixed annuities can be used – no variable or indexing products are allowed. There are no ongoing fees for fixed annuity accounts and agent commissions don’t reduce your principal. (Typically agent commissions are much lower on fixed annuities when compared to variable and indexed products.)
A QLAC is a type of deferred income annuity, but not all deferred income annuities are QLACs. Many deferred annuities will not meet the specifications required by the IRS to be a Qualified Longevity Annuity Contract. The IRS says these parameters must be met for a policy to qualify:
It’s important to know several carriers allow for inflation protection while also meeting the standards above. Yearly (or monthly) payments will increase by a predetermined value each year (usually 3-5%) or by changes in an inflation index like the CPI. This way, annuity owners know their payments are not fixed, but will grow year over year.
And if you established a QLAC when contributions amounts were lower, you can still invest the additional amounts in a new or existing QLAC. The original limit was $125,000 and is now $135,000.
How your QLAC is set up will determine what happens at passing. If it’s established as a life only plan, then all payouts will cease with no residual at passing. Joint plans will continue to a living spouse at passing. And those with a cash refund would return residual funds to the policy beneficiaries upon death.
Single life annuities offer the largest payouts. If you’re concerned about your beneficiaries inheritance, then establishing a cash refund is prudent. If you pass away before your income stream has begun, the accumulated value (principal & growth) goes to your named beneficiaries.
To be clear: It is only when you set up a “life only” plan will the insurance company keep any residual funds at passing. Life only plans are not very common and used when the owner is more concerned with maximum income and less with legacy planning.
There are several large, well-known annuity carriers offering QLACs including: AIG, American General, Brighthouse, Lincoln Financial, Mass Mutual, Mutual of Omaha, New York Life, Pacific Life, Principal, Western Southern and a few others.
We work with all of these carriers and can help you find the deferred income annuity that best suits your long term needs. Contact us today for more information.