Tax and Income Advantages of a Qualified Longevity Annuity Contract (QLAC)

Consider a QLAC When Designing Your Financial Plan
Consider a QLAC When Designing Your Financial Plan. Thomas Vogel / E+ / Getty Images

Do fear and greed guide your financial plan?

A financial plan is a system that allows all the parts to contribute to the success or failure of the whole plan. Planning is the act of projecting forward to what we want to build financially. There are eight components for constructing a financial plan, but I want to address the two that most often get overlooked. The first is becoming a financial consumer, and the second, is defining the purpose of each goal.

During the purchasing process, as a financial consumer, emotions and logic play a major role. The emotions mainly can be boiled down to fear and greed which create internal conflict. During the purchasing process, advertisers focus more on the sizzle than the steak to get you to buy. They want to stir your emotions and mitigate your logic. This explains why the most common phrases used to sell products are financial loss and performance. Knowing what you want and need in your portfolio makes it easier to filter through the sizzle to find the steak. Only then will the planning process take on clarity instead of emotions.

A QLAC can derail the fear that can steer your financial planning.

In order to achieve your financial plan you have to purchase products that meet a defined purpose. One approach taken in a financial plan is purposeful tax planning to eliminate or defer taxes when possible.

A Qualified Longevity Annuity Contract (QLAC) allows owners of qualified plans (IRA, 401k, TSA, etc.) to defer their required minimum distribution (RMD) to a maximum age of 85. In addition, it offers a method of income insurance during your later years by guaranteeing you will not outlive your money.

Use a QLAC to defer RMD payments and provide ongoing income.

By definition, you can now determine if a QLAC fits in your financial plan. If your purpose is to defer the RMD for as long as possible, and insure income you cannot outlive, a QLAC may be right for you. The ability to defer your mandatory distributions will reduce your taxes currently, and provide guaranteed income later in life. Based on these assumptions it would be worth your time to further investigate how a QLAC works.  

Make decisions based on the product details, not your emotions.

Digging into the details of the product are where your emotions may take over. But thankfully, a QLAC has limited options contractually. Asking yourself the following questions will allow you to determine if a QLAC fits in your plan:

  • Do you want to defer the mandatory distributions from your qualified plan beyond age 71?
  •  Do you want to insure you will have income later in life?
  • Do you want the income for both yourself and your spouse?
  • Do you want the income to last for your joint lives?
  • Do you want to defer the income from both spouses’ qualified plans?
  • Do you want to account for inflation?
  • Do you want money to go to a named beneficiary if you die prematurely?
  • How much money would you like to defer for this purpose? 

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It is important to understand the advantages a QLAC presents.

  • Guaranteed lifetime income deferred past age 71
  • Options on how the income is structured (single or joint)
  • RMD deferral to save on taxes up to a maximum age of 85
  • Transfer of risk with the contractual guarantees. You transfer the risk of managing your money to the insurance company in exchange for the deferral of guaranteed monthly income.

It is equally important to define the disadvantages of a QLAC.

  • The biggest drawback is the lack of liquidity. You transfer a lump sum of money to the insurance company for the deferred guaranteed income payments.

This brings up the emotions of fear and greed which can create conflict when faced with the lack of liquidity. Can you emotionally make the decision to accept some lack of liquidity within your portfolio?

Can you logically and financially make that decision? If the answer is “no”, and you are willing to take on the risk of managing your own money, a QLAC will not meet your logical and emotional needs. It is best to pursue other avenues.If a QLAC satisfies both your logical and emotional thought process, it may be a perfect fit and you can start searching for a QLAC that fits your situation.

Weighing out the advantages and disadvantages of the different types of annuities available is part of the process of being a financial consumer. Knowing your purpose makes the process of achieving your financial plan doable. If you fail to pacify both sides of your brain, the final decision will be elusive or result in poor decisions. Know what you want, define your purpose, learn the details, and then make the decision. Most importantly, don’t allow fear or greed to be the determining factor. Buy the steak because it fits your needs and plans… not because the sizzle sounds good.