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As you know, starting at age 70½, owners of qualified retirement accounts must take required minimum distributions (RMDs). However, some investors may not want to take RMDs on their entire pre-tax account, as it is all taxed as ordinary income and may provide them with more income than they need. Unfortunately, as their name implies, RMDs are required.
At the same time, today’s longer life expectancies may have some investors questioning whether they will have enough to cover their expenses in the later years of retirement. According to IRS life expectancy tables, there’s a 50% chance of a 65-year-old man living to age 85 and the same chance of a 65-year-old woman living to age 88. Retirees may find themselves needing income later in life to cover expenses which may increase as they age, such as prescription drugs, in-home care, and other health care related expenses.
A client with these concerns may benefit from a Qualified Longevity Annuity Contract (QLAC). A QLAC is a deferred income annuity that allows investors to postpone taking income from their traditional IRA or qualified employer-sponsored plan until up to age 85. With a QLAC, the investor shifts the longevity, market and interest rate risk to the insurer, who promises to pay guaranteed income for the investor’s life. This creates a pension-like income, and allows the investor to postpone taking such taxable distributions until age 85.
If your client is married, the QLAC can be structured to protect both the owner and the owner’s spouse from longevity, market and interest rate risk. A joint and survivor annuity option can be selected at contract purchase, which will guarantee income payments for the owner and the owner’s spouse for as long as they live. Simply structure the contract with the owner and owner’s spouse as joint annuitant’s and list the owner’s spouse as the beneficiary of the contract as well. That way if the owner or owner’s spouse die prior to or after the income start date, the survivor can continue the contract and receive income payments for the remainder of his/her life. If a return of premium death benefit is preferred, the owner can select a cash refund option.
Like all good things, there are limits. The IRS has limited QLAC premium to $125,000 or 25% of the investor’s qualified account balance, whichever is less. There are also restrictions on the flexibility of deferred income annuities that should be discussed with your client because the contracts are irrevocable, no withdrawals are permitted and will have no cash surrender value. These are just a few items to note. There are other considerations with a QLAC that should be addressed prior to recommending to a client. Advanced Markets can be a resource to assist you with a QLAC.
For the right client, a QLAC can let them postpone some required distributions and the taxes that accompany them. Call us in Advanced Markets if you have any questions.
This information is general in nature and not comprehensive, the applicable laws change frequently and the strategies suggested may not be suitable for everyone. Clients should seek advice from tax and legal advisors regarding their individual situation prior to making financial decisions. Mutual of Omaha and its representatives do not provide tax advice.
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For financial professional use only. Not for use with consumers.
The advice provided in this communication is not intended or written by the practitioner to be used and may not be used by you for the purpose of avoiding penalties that may be imposed by the IRS or any other taxing authority.
The advice in this communication was written to support the promotion or marketing of the transaction(s) or matter(s) addressed by the written advice.
You should seek advice based on your particular circumstances from an independent tax advisor.
