QLAC Social Security Strategies

QLACs and Social Security are Sort of Cellulerly Similar. By MedicalRF.com / Getty Images

Social Security makes you feel comfortable, but annuities not so much? It's a hypocritical stance!

So you say that you hate annuities? You wouldn’t touch an annuity with a 10-foot pole, right? Hold on Sparky because I have some good and bad news for you. You already own an annuity! Yes, you do! That annuity is called Social Security, and it’s the best inflation annuity on the planet. Stop yelling “Say it ain’t so, Stan The Annuity Man”, and accept the reality that you are an annuity owner.

Now that your annuity ownership reality has set in, let’s look at how the new Qualified Longevity Annuity Contract (QLAC) payments can be used in combination with your Social Security guarantees to create a solid income floor. By the way, you might even be able to lower your RMD taxes at the same time.

QLACs allow you to place the lesser of 25% of your total IRA, or $125,000 into a QLAC, with that amount being excluded from RMD account valuations. I’m assuming that you already “get” how your Social Security works, so I won’t go into those gory details. Call the Social Security Office if you don’t understand! 

QLACs and Social Security are the long lost brothers who just ran into each other at a retirement party.

 Both provide a lifetime income stream that you can never outlive. Both have, in essence, contractual guarantees. QLAC guarantees are backed in full by the issuing annuity carrier. Social Security is backed by me and you, which some people refer to as “the government.” 

With both QLACs and Social Security, the longer you wait to turn on the income stream, the higher the guaranteed payout amount. Social Security provides an 8% increase in your eventual benefit, so it’s a common sense reflex to try to hold off as long as possible to get a higher dollar amount. 

I hope you are getting the “annuity genetics” picture when comparing QLACs and Social Security payments.

  We have found the lost “longevity brothers”.

You have a large window of time in which QLAC payment start dates can be arranged.

QLACs allow you to defer as far out as age 85 before the income stream begins.  You don’t have to defer that long, but that is the maximum deferral age allowed. You could choose to start the income stream at age 74 or 80, or choose to ladder start dates by purchasing multiple QLAC contracts (within the premium limits).

Is it possible to arrange for lower RMD taxes,and take Social Security payments earlier?

Because the QLAC dollar amount is not included in your RMD calculations, your RMD taxes may be lower. They will provide an additional income stream in the future to complement Social Security.

With QLACs being allowed in Traditional IRAs, many people will now feel more comfortable taking their Social Security payments sooner knowing that the QLAC income stream will be kicking in at a future date.  There is worry about the possibility of Social Security being means tested or the qualification ages being raised. The QLAC guaranteed payments could provide a secure income environment where people lock in their Social Security payments earlier to circumvent these potential government tweaks.

In addition, turning on Social Security earlier knowing that QLAC guarantees are there for the future might lessen the possibility of having to tap into other tax-preferred or investment accounts. This happens frequently with people who choose to defer their Social Security payments. QLACs now give you another good choice, and contractual guarantees that you can depend on regardless of how long you live.

Every person’s retirement situation and the need for income are different, so there is no standardized way to utilize QLACs and Social Security. Everyone needs to assess their own situation to determine a plan of action. It’s important to include a qualified tax professional (not an annuity agent) when customizing your specific solution.