In July 2014, the IRS released final regulations on QLACs, or Qualifying Longevity Annuity Contracts. These “deferred income annuities” can be purchased by IRAs and qualified plans (within limits) and the contract values will be exempt from RMD rules until age 85, thus allowing even greater benefit of tax deferral. However, the regulations are fairly complex and raise some questions that they don’t answer.
Here are six questions that producers are asking about this new, popular product.
Q: Can a QLAC in a qualified plan be converted to a Traditional IRA?
A: Some qualified plans must offer a qualified pre-retirement survivor annuity (QPSA). A QLAC in such a plan, having such required language, may prove problematic when transferred to an IRA with a non-spouse beneficiary.
Q: Can a QLAC in a qualified plan be converted to a ROTH IRA?
A: It is not yet clear whether a QLAC in a qualified plan can be converted to any type of IRA. Gary Mettler believes that unless it is determined that the rules specifically disallow such conversion, some insurers will permit it: “It’s a logical extension. They will just use the same 12/31 valuation statements for RMD purposes or perhaps a specially prepared valuation statement at the time of conversion. They would then issue the appropriate Roth amendments to the contract.” That said, the same QPSA requirement for qualified plans as noted above may prove administratively difficult.
Q: Can a QLAC in a Traditional IRA be converted to a ROTH IRA?
A: The final regulations do not prohibit such a conversion, but the resulting contract will not be a QLAC, nor will it need to be, as Roth IRAs do not have RMDs during the life of the IRA holder.