QLAC Income Later Strategies
QLACs were designed in 2014 as a new product to deliver income later.
When building an income strategy, you will need income now or income later. You either want income payments to start immediately or at a specific time in the future. A QLAC solves for income later needs using funds from a Traditional IRA. If your portfolio needs to fill a gap in income at some point in the future, it is a good idea to understand this option.
July 1st, 2014, the Department of the Treasury and the IRS approved the use of QLACs.
Qualified Longevity Annuity Contracts can be purchased with money from specific employee retirement plans and Traditional IRAs. The current premium limitation is the lesser of 25% of your total Traditional IRA (not Roth) assets or $125,000. So if you have total IRA of $500,000, then you can purchase a QLAC at $125,000. If your total IRA balance is $200,000, then the approved QLAC amount would be 25% of that balance, or $50,000. Got it?
In 2004, longevity annuities (deferred income annuities) were introduced to solve for future income needs.
The “LA” part of QLAC stands for Longevity Annuity. With a basic longevity annuity, you can defer as short as 2 years and up to 45 years in a non-IRA account. There are no market attachments, no volatility, and no annual fees. Longevity annuities are included in the fixed annuity family, so no complex moving parts either.
The simplistic transfer of risk strategy that the longevity annuity strategy provides, was attractive to the IRS and the Treasury Department. The simple structure is not a quality of variable or indexed annuities, and it is why both were NOT qualified under the QLAC banner, as they are anything but simple.
The exclusion is a good thing for the consumer, though the annuity industry is fighting a non-factual and money driven fight for the inclusion of those two product types.
QLACs defer RMD payments to age 85 the lesser of 25% of your IRA, or $125,000.
It doesn’t mean you have to defer to 85, but that is the limit. This is a big deal because normally at age 70 ½ you must take Required Minimum Distributions (RMDs) from your Traditional IRA. These distributions are taxed at normal income tax levels. QLACs allow you to defer that requirement on the money held within the contract. The result of this rule is lower taxes paid on your annuity RMD withdrawals. QLAC assets are NOT counted as part of your RMD calculation. It can add up to a big deal over time. If you have a $500,000 IRA, then buy a $125,000 QLAC under the premium limitations, you would then calculate your yearly RMDs on the remaining $375,000.
QLAC strategies are tailored to your specific situation.
You can choose when you want the income to start. You also have the ability to add your spouse to the lifetime income guarantee, and build in death benefits as well. Some QLAC offerings allow you to attach a contractual COLA (Cost of Living Adjustment) increase to the income stream.
This happens at the time of application, and you have the ability to choose the percentage increase. However, if you add a COLA to your QLAC policy, then your initial payment will be lower than if you did not choose this contractual increase. Annuity companies have the big buildings for a reason, right?
QLACs work well with and are similar to social security and pension payments.
QLAC income guarantees should be part of your overall “income floor” strategies, and work in combination with your Social Security payments and pension (if so fortunate). In my opinion, QLACs should be used as contractual “gap fillers” for income needs, providing a guaranteed income stream that you cannot outlive. If the QLAC premium limitations cannot completely fill that needed gap, then you can use a longevity annuity outside of your IRA to contractually guarantee that income goal.
The QLAC is here to stay, and if you need a guaranteed income in the future (aka: “income later”), then it might make sense to take a closer look.