In the USA Today article, “Securing retirement income with annuities,” Advice IQ’s Sterling Raskie explains how annuity products can help you create a lifetime stream of income. Raskie says that the goal of any retirement plan is to have enough income to live comfortably for the rest of your life. Annuity products can help you meet that important retirement goal. While there are many different annuity products that you can use to create income, Raskie focuses on using longevity annuities within defined contribution plans. An insurance company pays you a lifetime stream of income in exchange for a premium payment. The IRS made it easier to use longevity annuities within retirement plans last July. Qualified Longevity Annuity Contracts (QLAC) can now be more easily used in 401k, 403b, 457b and IRA accounts.
You can buy a QLAC from a qualified employer sponsored plan or traditional IRA with up to 25% of your total account balance. The amount cannot exceed $125,000. Roth IRA and Roth conversions do not qualify for use with QLAC products. The big change made by the IRS last year allows an exemption from the required minimum distribution (RMD) rule for that $125,000 QLAC. RMD rules require you to take withdrawals from from your 401k or IRA at age 70 1/2. The money you have in a QLAC does not have to be withdrawn at age 70 1/2. You can withdraw it at that age, but you have the flexibility to leave the money until age 85. This allows you to shelter some of your money to help fund your later years of life. With a $625,000 IRA balance, you would only be required to withdraw a percentage of $500,000 at age 70 1/2 if you had used the other $125,000 to purchase a QLAC.
Longevity annuities have optional benefits that make them even more desirable for your retirement plan. Many include a return of premium feature that works both before and after you have started receiving income payments. If you die before receiving any income, your beneficiary will receive your premium paid to them. If you die after receiving some income payments, your beneficiary will be paid any remaining premium that you had not yet received. Fixed rate annuities are the only annuity type that you can use as a QLAC. There are a couple reasons that the IRS made this requirement. Fixed annuities offer a predictable stream of income so that you know exactly what you will receive in the future. Variable and fixed indexed annuity products change with a market index. In addition to that, it’s much easier to compare plans when there is a limited number of options that offer similar choices. QLAC policies cannot be changed. You also cannot take your money in a lump sum with a surrender value benefit.
If you have any questions about using QLAC products or longevity annuities to create a lifetime income stream, an expert at Annuity FYI can offer assistance.