Is the QLAC a Retirement Longevity Solution for those of us funding retirement from our retirement portfolio? QLAC or Qualified Longevity Annuity Contract was created in 2014 by the US Treasury. The rules are dictated to the point that annuity providers can’t manipulate, fee-burden, or complicate these QLAC annuities.
QLACs are a Longevity Annuity. A type of deferred annuity designed to protect you from outliving your retirement portfolio late in your or your spouse’s life. The QLAC does come with some new tax benefits and restrictions.
QLAC – Deferred Annuity
A Deferred Annuity is the type of annuity where you give up a chunk of your money today to an insurance company that offers the annuity. They then hold that money until years later when in your older age you will receive a guaranteed monthly payment. The best part of any longevity/deferred annuity over the other annuity types is it takes a lot less money to provide the level of income desired. Other types of annuities would require, i.e. immediate annuity much more invested to provide the same payment amount.
QLAC Fixes a Deferred Annuity Tax Issue
The Longevity/Deferred annuity tax problem came when you purchased the Longevity Annuity within your IRA with a starting payment date after age 70. That complicated the age 70 ½ RMD (Required Minimum Distribution) calculations. That was because the annuity is counted as part of your IRA but locked into a delayed and longer payment contract. The RMD remittance would have to make up from the remaining IRA assets to meet requirements or starting payments then from the annuity earlier than wanted. The QLAC fixes this tax issue as the QLAC allows delaying its inclusion in the RMD up to age 85.
Is the QLAC a Retirement Longevity Solution – QLAC Details
Dollar Limitations are part of the QLAC Requirements.
- The total amount of premiums paid by an individual for QLAC(s) can’t be more than $125,000 or 25% of total IRA balances (excluding Roths), whichever is the least. For example- A $200,000 IRA portfolio could only contribute up to $50.000 to their QLAC due to the 25% threshold rule.
- To set the 25% of IRA balance threshold, total IRA assets are measured as of 12/31 (EOY) of the previous calendar year.
QLAC payout requirement.
- Your first received QLAC Annuity payment MUST begin no later than the first day of the month that follows the month you turned 85 years old. You can begin your QLAC payments earlier but this is the longest you can delay payments.
QLAC Annuity Limitations
- The QLAC cannot be a variable annuity or indexed annuity.
QLAC Permitted Options (riders)
- Survivor Benefits to a designated beneficiary that meets certain requirements, ie. the survivor benefit cannot pay more than payments paid to the original QLAC owner.
- Inflation adjustments.
- ROP- Return of Premium rider. Where at the death of the original QLAC owner an amount equal to the owner’s premium(s) paid for the QLAC minus any amount that may have been paid out before their death will be paid to the designated beneficiary.
Aside from delaying RMD and associated taxes for the QLAC amount there can be other benefits. Primarily to your Systematic Withdrawal Strategy or Bucket Strategy. Having a QLAC may allow you to withdraw a higher percentage of your portfolio early in retirement. Up to 30% more. According to some of the financial industry articles I have seen. It is possible to safely take a higher percentage of your portfolio by having annuity income for your late retirement years.
The QLAC Annuity was created to be easy to understand, transparent, and straightforward requiring only your upfront payment and being offered without annual fees.
|Sample QLAC Annuity Rates – July, 2015 (ImmediateAnnuities.com)|
|If you invest $100,000 in a Cash Refund QLAC, you’ll receive the following monthly income beginning at age…|
|Present gender/age||75||80||85||Male Age 50||$1,882||$2,999||$5,297||Female Age 50||$1,752||$2,680||$4,598||Male Age 55||$1,553||$2,474||$4,477||Female Age 55||$1,461||$2,228||$3,773||Male Age 60||$1,334||$2,022||$3,646||Female Age 60||$1,215||$1,845||$3,108||Male Age 65||$1,057||$1,701||$2,924||Female Age 65||$972||$1,505||$2,503|
Purchasing a QLAC
The annuity MUST be designated and labeled a QLAC right from the get-go to qualify. Any standard longevity annuity will not qualify.
When Regulators were writing the rules for QLACs they envisioned that people who purchased them would only allocate 10% to 20% of their portfolio for their QLAC. Leaving the rest of their portfolio to generate their retirement income for their earlier years before their QLAC payments kick in.
Since QLACs are so new, as of May 2015 immediateannuites.com shows that only 3 insurance companies are offering them. However as QLACs become more known it is expected they will be more prevalent in the annuity market.
- American General
- Pacific Life
- Principle Financial
You can buy multiple QLACs to build a QLAC ladder with different maturity or payment start dates. Just as long as the total amount of QLACs purchased does not exceed the $125,000/25% IRA portfolio thresholds. The latest payment received start date must be by age 85.
Is the QLAC a Retirement Longevity Solution? – Overall QLAC Benefits
- Taxes– Reduce/Delay taxes with age 70 ½ RMD reduction
- Income– Plan for future income, longevity/late retirement, market downturn protection, opportunity for inflation protection.
- Other Benefits—No annual fees. Survivor Benefits for spouse or other designated beneficiary. ROP if premature death before payments begin or before there has been a return of principle paid out.
Annuities are full of small print and high fees. They are hard to surrender without a high cost. It is also complicated to understand everything you are getting when you sign the contract. This is what makes annuities less than desirable.
I had not heard of the QLAC until recently. Now that I’m aware I may look at adding one to my long-term retirement and RMD related tax strategies.
I hope I have provided you with enough information about QLACs to explain their benefits. Do some research and play with the QLAC Annuity Calculator running some numbers. Then decide for yourself. Is the QLAC a Retirement Longevity Solution?