Do you have clients with qualified dollars in defined contribution plans like 401(k)s or various types of IRAs earmarked for retirement? I bet the answer for most of you is yes. A growing number of people are relying on qualified more than non qualified assets that they will eventually need to turn into retirement income. With this trend, advisors will need to know their way around a QLAC and how it helps their clients with their qualified assets.
The Treasury Department’s establishment of the Qualifying Longevity Annuity Contract (QLAC) is seen as a regulatory endorsement of the retirement industry and another signal of an emerging emphasis on the power of guaranteed income within the overall retirement system. It also represents an opportunity for advisors to counsel their clients on what a QLAC can mean for their retirement. In fact, QLAC might be the best conversation starter we’ve seen in years. Here are three things you should know about QLACs:
QLACs help clients get the retirement they want
Until now, an individual’s ability to create a personal retirement income plan tailored to his or her specific needs has been limited by Required Minimum Distribution (RMD) rules, which generally require retirees to begin withdrawing from their qualified accounts by age 70½. Now, your clients will have the freedom to build their own customized income plan, without an arbitrary deadline to start withdrawals, by purchasing a Deferred Income Annuity (DIA) as a QLAC with a portion of their qualified assets. They’ll put money in as they near retirement, and select a date to start income at any age up to 85. This works for:
- a client who wants to use other assets to fund the early years of his or her retirement,
- a client who wants to defer income to pay for expenses later in life, or
- a client who wants to work into his or her 70s without having to also pay taxes on their retirement savings.
New York Life has tracked income start dates on our deferred income annuities (before QLAC was an option). What we see is that our clients who purchase DIAs with non-qualified money start to take income from them as early as age 60 to as late as 85. This illustrates to us that retirement income needs are very different for each individual. Conversely, the income start date for those clients using qualified money sits in the 68-70 age range because of the RMD requirement. The QLAC regulations recognized those differences and now individuals with qualified dollars will have the same choices as those with non qualified assets.
QLAC lets clients flex their deferral muscle and maximize income.
Certainty can make all the difference in a retirement strategy. Consider two scenarios. In the first, a client has his qualified dollars in a standard IRA. At age 70½, he’ll have to begin taking RMDs. Because he’s withdrawing principal from his IRA, but it’s also growing at a fixed rate, the RMD amount will vary every year, making planning more complex. The RMD formula will gradually increase annual income, but then taper off, putting this client at risk of outliving his IRA.
In a second scenario, an individual uses a portion of his qualified assets to purchase a deferred income annuity as a QLAC. Now he can start income at any age up until 85, without depleting his assets through RMDs. He’ll maximize his pre-determined income amount every year for the rest of his life, guaranteed. These income payments will automatically satisfy the RMD requirements for those assets, taking the guesswork out of the equation. When you simplify and add certainty to your clients’ retirements, you’ll both win.
To know a QLAC is to love one
Most clients seek financial guidance to better their financial situation. Knowing how the QLAC regulations can enhance your client’s financial plan will set you apart. Talk to your clients about their needs in retirement, show them how a portion of their tax-qualified retirement assets can produce a significant stream of income — for life! You’ll prove to them how crucial your advice can be and convince them that you can deliver even more value through holistic retirement planning. And as we all know, a holistic plan usually means a client is asking for advice on an even greater portion of their assets.
To take full advantage of this opportunity, it’s important to understand some of the criteria associated with QLACs, particularly for IRA accounts. Some things to keep in mind:
- QLACs can be funded from the following qualified plans and accounts: 401(a)s, 401(k)s, 403(b)s, government 457(b)s, and IRAs. A QLAC must be a fixed-rate deferred income annuity contract, which does not have cash surrender, liquidation, or commutation features.
- Premiums paid into a QLAC are limited to the lesser of $125,000 or 25 percent of the owner’s qualified account values, less previous QLAC premiums. The 25 percent limit applies to each qualified plan separately and to IRAs on an aggregate basis. For IRAs, the 25 percent limit applies to aggregate account balances as of December 31 of the year prior to the year in which a premium is paid. The issuing company must file information annually with the IRS regarding QLAC values and status.
- Income payments from a QLAC must begin no later than the first day of the month following the owner’s 85th birthday. Payout options include single or joint life only payments or single or joint cash refund payments. Some companies may require that joint annuitants are spouses.
- Only deferred income annuity contracts that meet certain requirements can qualify as QLACs.
- There are significant tax implications for your clients, so make sure your client consults their CPA to determine how a QLAC will impact their taxes.
Have QLACs helped you grow your business? Tell us how you did it at AnnuityBlog@newyorklife.com