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 investment growth, future income streams and simplicity.
Many investors like QLACs as they simply lower taxable income from RMDs at age 70 1/2. Invested funds can postpone RMD withdrawals for years and allow for additional compounding tax-deferred growth. Distributions can be withdrawn later when the account owner is in a lower tax bracket.
For example: If you had $520,00 of IRA funds, you could invest $130,000 in a QLAC that would defer payments on the $125K until age 85. (The remaining $390,000 would be subject to RMDs at age 70 1/2.) In this scenario, RMDs could be deferred for nearly 15 years on a substantial portion of IRA funds thus reducing taxable income while also taking advantage of additional tax-deferred growth.
Additionally, deferred income annuities can establish a large (sometimes increasing) income stream when funds might be needed most. More people are working past their 60’s and into their 70’s. It can be beneficial for some to postpone taxable RMDs when they are unneeded while having additional time for investment growth, and creating larger payouts when more income is needed later in life.
QLACs are also popular as there are very few moving parts. Only fixed annuities can be used – no variable or indexing products are allowed at this time. There are no ongoing fees for for fixed annuity accounts and the agent commissions are built into the product. (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 also important to know that several carriers allow for inflation protection while also meeting the standards above. Yearly (or monthly) payments can increase by a predetermined value each year (usually 3-5%) or by changes in an inflation index like the CPI. This way, annuity owners will know their payments are not fixed, but have the ability to grow year over year.
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 will offer the largest payouts. If you are 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 would go 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, Lincoln Financial, Mutual of Omaha, Pacific Life, Principal – and more are sure to come.
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.