There’s a lot out there on the new Qualified Longevity Annuity Contract (QLAC) regulations and ramifications for retirees. The July 2014 rules ushered in a new landscape that can be confusing for both retirees and advisors.
Things can seem confusing, so here are the straight benefits.
Simply put, these new retirement tools can reduce required minimum distributions (RMDs), fill potential income gaps and limit retirees’ tax liabilities.
Perhaps most importantly, QLACs can help open doors with clients on crafting retirement income plans that systematically create, sustain and protect income.
In a general sense, QLACs are contractual wrappers that currently house deferred income annuities (DIAs). The regulations allow a DIA to be established with qualified assets, with the future annuity payments locked in at the time of purchase.
The lesser of 25 percent or $125,000 of an individual retirement account (IRA) can be used to fund a QLAC. That amount is excluded from RMD calculations, which can lower the distribution, and hence a retiree’s taxable income.
A nice QLAC feature is payments can be delayed up to age 85. This can offer advantageous timing in a retirement income plan and help fill potential income needs that can occur later in a client’s life.
With QLACs, both spousal and non-spousal beneficiaries can receive the remaining purchase premiums, keeping them instead of the annuity carrier. If the cash refund option is elected, any remaining principle can be returned.
Like any annuity, there are several income options that can be elected within the contract. For instance, some offer a cost of living adjustment (COLA). Also, one could forgo the cash refund and go with life only payments for more income. But perhaps the most important foundational piece is the competitive guaranteed future income insurance companies are able to generate within these product types.
The QLAC rules don’t allow commutation, so contract holders receive the pre-determined income stream. The contract is illiquid, so retirees can’t withdraw money.
Prior to the new regulations, DIAs were available, but pre-QLAC DIAs are more restrictive in how they’re purchased. That is, they must be purchased under a qualifying employer-sponsored retirement plan or IRA.
Essentially, QLACs offer new flavors of a traditional retirement tool with more flexibility.
Fork in the Road
The QLAC is a new planning tool, but it’s just that – a tool. Still, its flexibility is opening doors to create real retirement income plans.
To me, the value proposition (and proverbial fork in the road) centers where the retiree’s money goes.
- Pay the taxes on RMDs
- Pay an insurance carrier, whose law-of-large-numbers leverage can enable competitive income streams
In the end, the difference is not often a huge sum of money. Still, would a retiree rather have their money go towards taxes or to their benefit?
Success takes a holistic approach that examines a retiree’s entire life, including a broad view of the solutions available. This open the doors to creating an income plan that solves both the identified needs in retirement, as well as the unknown as much as possible.
I suggest partnering with a proper tax advisor so you have the firepower and verification needed to create a plan that includes QLACs.