Reduce Your RMD with a Qualified Longevity Annuity Contract

You’ve worked hard your entire life to stash away your hard-earned money into 401(k)s and IRAs, and you’re finally ready to retire. First of all, congratulations! Now, it’s time to deal with your tax dilemma. Generally, you have to start taking required minimum distributions (RMD) when you reach the age of 70 ½, and sometimes this amount can be somewhat substantial. So substantial in fact that it could trigger higher federal income taxes, an increase in Medicare premiums, and taxation of up to 85% of Social Security benefits.

If you don’t want/need the full amount of the RMD to support your lifestyle, there are only a few options that can put it off.  A recent Kiplinger article explored one of the options to help reduce RMDs and solve this tax dilemma: the qualified longevity annuity contract. A QLAC is an insurance product that allows retirees to keep some of their tax-deferred savings aside, growing tax-free, while RMDs begin.

Here’s how it works: A QLAC offers a guaranteed stream of income in exchange for a lump sum of money. You can take 25% from your retirement plan assets, like an IRA or 401(k), up to $125,000 for an individual or $250,000 for a couple, to purchase your QLAC. And the best part, you can defer this money until a maximum age of 85.

According to the Kiplinger piece, here are some ways a QLAC could work in your retirement plan:

  • As a tax-saving strategy: As described above, a QLAC can soften the tax blow on your RMDs. For example, if you have $500,000 in your traditional IRA, and put $125,000 in a QLAC, your RMD will now be calculated on $375,000 instead, potentially lessening the tax blow.
  • One of the goals of the QLAC is to help ease the concern of outliving savings. If you retire at the age of 65, you could have 20+ years to make your money last. Your QLAC will be there for you when you reach 85, or whatever age you defer it to.
  • Your QLAC could be a replacement for an employer pension. These are fixed annuity products, so your principal is protected. If you live a long life, the amount you receive may add up to be greater than if you had saved the money on your own.
  • QLACs also offer an opportunity to leave a legacy. A death benefit option is available at the time of purchase, allowing you to designate your spouse, children, grandchildren, or anyone else to receive your funds. If you pass prior to receiving any income payments, the amount you paid into the account is then paid to your beneficiary.  

Just as with any other financial product, annuities are not appropriate for everyone. One of the biggest drawbacks often cited with these products is that you can’t change your mind without suffering heavy penalties. One important provision available to add in your QLAC ts an income start date change rider. This will allow you to accelerate the payment of income to as short as five years after you made the purchase if you decide you need some additional income. While forfeiting liquidity seems like a pretty big “con,” keep in mind that instead of access to your money, you now some peace of mind and have reduced the amount of your RMD to a maximum age of 85. It is always recommended to consult with a trusted financial advisor before entering into any contract. 

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