The Internal Revenue Service took a needed step toward making delayed or longevity annuities a viable option for retirement savers, with its July issuance of qualifying longevity annuity contract final regulations.
This action will make it more attractive for savers to use retirement assets to purchase longevity annuities, which begin their payment stream at an advanced age, such as age 80 or 85. The key to QLAC appeal will be the ability to exclude annuity contract costs from required minimum distribution (RMD) calculations, and the resulting taxation that generally begins at age 70 ½.
Up to 25 percent of aggregate IRA and employer retirement plan accumulations – not to exceed $125,000 – can be used for QLAC purchase and still be excluded from the balances that will determine taxpayer RMDs. The question no one is able to answer at this point is how attractive this investment option will be to those with assets accumulated in IRAs or employer plans.
It is a safe assumption that it will take time for interest to grow.
Longevity annuities are not actually a new product, but until now they did not offer the tax benefits provided by these final regulations.
Another term some use for longevity annuities is “death insurance.” If structured to begin payout at an advanced age and to last throughout the annuitant’s lifetime, he or she can be assured that they will not outlive these funds. A valuable assurance, to be sure.
Until now, longevity annuities have typically been purchased with nonqualified assets as part of a comprehensive financial plan intended to provide for an individual or a couple throughout their retirement years. At the risk of over-generalizing, it is likely that the buyer of a longevity annuity is a person of above-average wealth, able and willing to part with a substantial sum to purchase a contract whose promised return does not begin until at a date that may be 10, 15 or 20 years in the future.
The younger the buyer, the less expensive the longevity annuity, but the longer one will wait before seeing a return on the investment. In some cases, depending on how a longevity annuity is structured, there could be no return if the annuitant dies and there is no residual payment stream guaranteed to a beneficiary.
Given these realities, the longevity annuity has understandably been a niche product to date.