A QLAC is a deferred income annuity. For 2018, IRS Rules allow an individual to transfer up to 25% of their Traditional IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b) or 457(b) or a Maximum of $130,000 whichever is less into a QLAC. However, funds from a Roth IRA or Inherited IRA are not eligible for transfer. Money transferred to a QLAC is NOT COUNTED in the IRA balance when it comes time to take Required Minimum Distributions (RMDs). This means a retiree will be able to lessen their tax burden. Once deposited into a QLAC, the money grows and can be converted to a lifetime income stream anytime between the ages of 70 and 85. Once a retiree starts taking income from a QLAC, it will be subject to ordinary income taxes; however, the individual could be in a lower tax bracket by that point in his/her life.
Qualified Longevity Annuity Contracts can be purchased from a Life Insurance Company that offers the product. Keep in mind, an annuity is NOT an investment. It is a life insurance product that provides a lifetime income stream which could be subject to the claims-paying ability of the Life Insurance Company. As an insurance product, many annuities including a QLAC, offer riders that can be added to the annuity contract. The most common riders for an annuity include Cost of Living Adjustment, Inflation Protection, and Long-Term Care. In addition, an annuity can be passed to beneficiaries or heirs upon the death of the contract holder just like a life insurance policy.
Given the current longer life spans and complex tax laws, it is important to have a source of income you won’t outlive while potentially reducing your taxes and providing for your heirs. A QLAC could be an important part of your retirement income and estate planning. A financial and tax professional can help determine if a QLAC is appropriate for you.
Note: Annuities can be very complex. Make sure you are aware of the contract’s features, benefits, provisions, fees, expenses, surrender charges, and agent commission before proceeding. An Annuity is NOT a short-term product. Do Not Purchase an Annuity If You Cannot make a lifetime commitment to keeping the money allocated to the annuity.
Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor. He is an Investment Advisor, Life Insurance Agent and does Financial Planning. If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com.
