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Articles, wit and wisdom about retirement planning, tax management and living a long life.


How to Buy a QLAC

 

So, you’ve decided you need a Qualified Longevity Annuity Contract (QLAC), pronounced cue-lack.  

You have decided that a QLAC purchase is an excellent way to insure against the risk of outliving your assets.  You have sufficient IRA retirement assets for the purchase to make sense.  Your good health makes it reasonable to expect you will need QLAC annuity income when you are in your late 70’s and 80’s and hopefully, after.  You’ve used QLACguru’s calculators, spoken with your advisors, and evaluated whether the purchase makes good sense from a tax perspective.  (Please see our previous blog post on 8 Signs You Need a QLAC).

Now what? 

Set out below is the step-by-step process for purchasing a QLAC.  (For an infographic summarizing this blog piece, click here.) While this process may vary slightly from carrier to carrier and agent to agent, here is guidance on what to expect along the way to owning a QLAC Annuity:[i]

1.       Select an Agent or Broker.  Given the newness of the QLAC product, there are relatively few agents who are well-versed in the sales and illustration of QLACs.  Whether you ultimately buy from an online agency or a local provider, we recommend starting with an online agency with a comparison quoting engine.  Why?  Annuity Carriers vary in terms of how they price different QLAC product features. Local agents typically represent only one or two carriers while online agents like immediateannuities.com will quote 7 or 8.  So, even if you are uncomfortable making your purchase online, it pays to start your QLAC journey comparison shopping multiple carriers online first, rather than go straight to a single, local provider.  

 Here are five questions we ask when selecting an agency:[ii]

  • How long has the agency been in business?
  • With how many carriers offering QLAC annuities does the agency work?
  • How many QLAC annuities has the agency sold?
  • What is the agency’s Better Business Bureau Rating?
 

2.       Select QLAC product attributes that are best for you.  If you are married, you will need to determine whether you want to have income over the length of one life or choose a Joint & Survivor benefit which will pay over the lives of both you and your spouse.  If you have children or other heirs in your retirement plans, you will want to choose between an annuity with a “Cash Refund” (Return of Premium -- ROP) feature which provides a return of the unpaid premium amounts upon your death and a “Life-only” annuity with no death benefit.  A Cash Refund/ROP annuity will provide a better outcome for your heirs if you die early but will pay a lesser benefit during your life than a Life-only policy.

3.       Select a carrier.  Each of the decisions about product features above includes economic trade offs.   Each of these features will be priced differently by different carriers.   Also, you will want to verify the claims-paying abilities of each of the carriers by checking their credit ratings (e.g., A.M. Best).

4.       Request Annuity Purchase Paperwork.  Know what you want? Ready to pull the trigger?    It is time to contact your agent or broker.  Together, you will review your plans.  Your agent will go through an application questionnaire with you, which will allow your agent to complete the carrier’s annuity application partially.  During the review of the application questionnaire, the agent will verify the amount of the annuity purchase, making sure you are meeting all the tax rules for a QLAC purchase, including limits on how much you can contribute to your QLAC annuity.   The Qualified Longevity Annuity Contract or "QLAC" premium purchase is limited to 25% of a retirement plan (i.e., assets held in tax-qualified accounts such as an IRA), but no more than $135,000 from all plans.  Your agent will request a copy of your end-of-prior-year IRA balances from your IRA account required for the paperwork.   Other questions in the questionnaire will include the name of your IRA Custodian and your IRA account number.  Your QLAC application will also include a funds transfer form, which allows your insurance carrier to request funds directly from your IRA custodian. This kind of transfer is called a trustee-to-trustee transfer, which means you will not need to write a check to buy your QLAC policy.     

5.       Complete and Mail Annuity Application Paperwork.  The agent will overnight the carrier application to you for your review and signature.  The agent will typically include a prepaid envelope which you will use, depending on the carrier, to mail the application and funds transfer form to the carrier for processing.  It is important to review your annuity application paperwork with your agent and sign all the forms including the funds transfer form. Once the application is completed, your work is done.  The agent or broker will follow up with the insurance company to make sure that the package was received and is in good order. 

6.       Sign Receipt of Policy Delivery Notification.  Over the next two weeks, the Insurance company requests funds using the form you signed, and the IRA custodian mails the check to the Insurance Company on your behalf to purchase the annuity.  Then your QLAC annuity contract is printed by the carrier and overnighted to your agent. Your agent will make sure that the contract is correct, and will then overnight the contract to you.  Once you receive the contract, you will be asked to sign and return a receipt of delivery notification.  This notification is to confirm that you have received the annuity contract.  Often, both the carrier and agent (or broker) will request a copy of this document.

7.       Calculate Your Lower Required Minimum Distributions!  Once the carrier funds your QLAC, it must file a 1098-Q identifying you as the owner of a QLAC.  The document includes your taxpayer ID and the balance of the newly formed QLAC.  After age 72, your Required Minimum Distributions will be reduced because the QLAC purchase price is no longer part of the IRA account balance. Because the distribution was made to purchase a Qualified QLAC, that IRA distribution is not as taxable. 

8.       Receive Yearly Annuity Account Correspondence.  You will receive an annual statement of account from the insurance company.   This statement typically includes the Income start date and the amount of the benefit.  Depending on your annuity contract features, some companies will allow you to adjust the annuity start date, moving it backward or forwards in time, typically in five-year increments.  This flexibility usually applies to cash refund (Return of Premium) policies only.  (If you think you’ll want this kind of flexibility, ask which carriers offer this flexibility before you buy the QLAC.)

9.       Decide How Annuity Payments Should Be Made.  One to two months before the income start date of your annuity, many carriers will send a letter offering to set up direct deposit.  You can choose to receive a paper check or direct deposit.  For this, you will need to provide a voided check and your checking account information.

10.   Enjoy Life-long Annuity Benefits Payments.  Congratulations!  Because of your careful planning, you will receive annuity payments from the insurance company for the rest of your life.  Uncle Sam will treat your QLAC annuity benefit payments as ordinary income.  You will receive a 1099-R from the insurance company at the end of each year recognizing this income to you.  The longer you live, the smarter you will feel about your QLAC purchase! 



Want to learn more? Check out our videos page to see additional QLACguru videos.  See our calculators page to develop an anonymous RMD calculation and estimated QLAC quote. Answer specific questions by going to our Knowledgebase page.  Visit our blogs page for in-depth articles on a variety of topics including how QLACs help with sequence Sequence Risk, how QLACs are similar to and different from Social Security, as well as many other topics. Free Consultation.  If you would like us to develop a free RMD analysis and illustration of how a QLAC might work for you, please click here.


8 Signs You May Need A QLAC

A Qualified Longevity Annuity Contract (QLAC)  – pronounced 'cue-lack' - is a new type of annuity product designed to insure against the risk of outliving retirement assets.  The QLAC investment was made possible by enabling legislation from the US Treasury in July 2014.  At that time, the Treasury issued final IRS regulations that defined QLACs.  The QLAC  product remains relatively unknown to the investing public. 

Briefly, an owner of a traditional Individual Retirement Account[1] (“IRA”) can transfer funds out of the IRA to pay a premium[2] to purchase a QLAC.  That transfer is not treated as a taxable event.  Instead, the asset balance in the IRA is reduced by the transfer/premium, thereby reducing required minimum distributions from the IRA.  (Go to qlacguru.com/calc to find a free tool to help project tax deferral amounts).  Only distributions from the QLAC are taxed to the owner, and such distributions can be deferred to as late as age 85.  Once distributions begin, they are paid for the life of the QLAC annuity owner[3], no matter how long he or she might live. (Click here to open a separate window on a partner site to see how much monthly income a QLAC purchase might generate.)

QLAC’s are not for everyone. Here are eight signs that you, an IRA owner, may be a candidate for a QLAC purchase. (For an infographic summarizing this blog piece, click here.)

1.       I am retiring or about to turn 72.  Age has an important bearing on when to make a QLAC purchase.  QLAC investors typically choose to make a QLAC purchase near retirement (for example, the early to late sixties), or upon reaching the age of 72.  Here is why.

·         At Retirement.  At retirement, many retirees choose to or are required to move their assets from their employer-sponsored retirement accounts (e.g., IRA, 401(k) or 403(b) accounts) into an individually managed IRA account. At that time, retirees are faced with their first decision whether to purchase a QLAC.

·         At Age 72  The next most common time to evaluate QLACs is when an IRA owner approaches age 72. This milestone is the age at which IRS accounts[4] will be required to begin taking  Required Minimum Distributions (“RMDs”), or the owner will subject to severe IRS penalties. For those outside the top 5% in income, the question becomes one of measuring the income security from a bond portfolio versus the guaranteed income from a QLAC.  Also, to be factored in is the tax cost of RMDs without a QLAC versus the savings from reduced RMDs with a QLAC. Go to  qlacguru.com/calc to find calculators that will help analyze how much one may contribute to a QLAC and the tax deferral impact of a QLAC purchase.

2.       I am healthy and expect to live for a long time.  Good health and likely longevity are key variables in deciding whether to purchase a QLAC.  For example, take a 69-year-old male smoker with a history of cancer and heart disease in his family.  This man is highly unlikely to see his 80th birthday. A QLAC is probably not for him. This is because the QLAC has no cash value and cannot be undone after purchase.[5] On the other hand, for a 69-year-old-female in great health and with a family history of great longevity, a QLAC purchase can make a good deal of sense.  QLAC annuities payments will continue for life, even if she lives to be 105!

3.       I have retirement assets.     Most insurance carriers offering QLACs have $15,000 minimum premium.  Immediateannuities.com prefers to sell QLACs with a minimum purchase amount of $20,000.  This translates to a minimum IRA balance of $60,000-$80,000. The overall premium limit of $125,000 is 25% of $500,000 of IRA assets. The Qualified Longevity Annuity Contract or "QLAC" premium purchase is limited to 25% of a retirement plan (i.e., assets held in tax-qualified accounts such as an IRA), but no more than $135,000 from all plans.  (The $130,000 lifetime limitation was increased to $135,000 on January 1, 202- and will increase from time to time thereafter.)  As the QLAC premium falls as a percentage of a persons’ IRA assets (over overall assets), the relative impact will decline.  But if two members of a couple each own separate IRAs, both members may purchase a QLAC, subject to the previously mentioned limits.

4.       I have an estate plan in place.  Most parents want to avoid becoming dependents of their offspring.  A QLAC is designed to do just that – lifetime income prevents one from becoming a dependent. On the other hand, a QLAC is not a tool to build an estate.  Typically, the QLAC purchaser’s gift to the next generation is freedom from the need to financially support and physically care for the prior generation.    Go to the Get Quote tab on the right-hand side of the page on QLACguru.com to see how much income a QLAC purchase would provide.

5.       I can use some help staying on budget.  By the time we reach our sixties, some of us are very good at living on a budget.  Others are not.   A person with too little discipline can easy spend away savings with a weakness for travel, new cars, expensive clothes, or lavish gifts for grandchildren.  For this individual,  a QLAC purchase can impose discipline by simply making the assets out of reach.   Socking away up to 25% of your retirement assets now into an instrument that will begin paying fixed amounts during later years, can be a clever way of budgeting for future retirement income needs.  Ironically, this can allow one to be less concerned about the adequacy of savings early retirement years, safe in knowing that the income needs anticipated in later years have been addressed by the QLAC purchase.

6.       The Investment climate is uncertain.  The current stock market, bond market, and interest rate returns can have an important bearing on the decision to purchase a QLAC. If returns to investors are high, as they were during the 1990s, for example, then an IRA owner may be able to apply the 4% rule of thumb, selling off 4% of the IRA assets each year and applying the proceeds to living costs. If, on the other hand, the investment returns climate is more uncertain (as it has been in recent years), then that IRA owner may want to purchase a QLAC and lock in an annuity payment for the future. The QLAC will deliver a fixed return and remainder of assets in the IRA will still subject to market gains or losses.  The QLAC buyer has simply reduced his or her exposure to market fluctuations.

7.       I have a lower tolerance for risk.   Some people lay awake at night and worry when there is turbulence in the markets. For these folks, a QLAC may be a good way to assure future income and current rest. If, on the other hand,  someone is comfortable with fluctuations in the market, even those that affect a retirement nest egg, then that person may be more comfortable self-insuring against the probability of running out of money in retirement.

8.       I want to defer taxes.  A QLAC offers two potential tax advantages, which may or may not be of consequence to different IRA owners.  When the IRA withdrawal occurs to pay a QLAC premium, that distribution is not taxed.[6]  QLAC distributions are fully taxable when paid.  As a result, the QLAC buyer gets a 10 to 20-year deferral of taxation between premium payment and benefit receipt.  Further, in most instances, the IRA owner is in a higher tax bracket at the premium purchase date than he or she will be when the QLAC pays benefits.  Both tax deferral and lower tax rates can mean more spending money for the OLAC buyer. The second QLAC tax benefit is that the QLAC premium is not deemed part of IRA assets – even though there was no distribution deduction treatment.  The RMD is determined by dividing the IRA assets (after the QLAC premium withdrawal) by a fixed factor that IRS sets for each age.   With the IRA assets reduced by as much as 25%, the RMD after a QLAC purchase reduces proportionately. When this reduced RMD is sufficient to meet living expenses, the IRA plus the QLAC should produce enhanced future retirement income over the IRA alone alternative.  Every person’s facts and needs are different. (Click here to open a calculator that can show how this might work based on your facts.) There will be exceptions to any generalization. 

Want to learn more? Check out our videos page to see additional QLACguru videos.  See our calculators page to develop an anonymous RMD calculation and estimated QLAC quote. Answer specific questions by going to our Knowledge base page.  Visit our blogs page for in-depth articles on a variety of topics including how QLACs help with sequence Sequence Risk, how QLACs are similar to and different from Social Securitybest practices in buying a QLAC as well as many other topics. Free Consultation.  If you would like us to develop a free RMD analysis and illustration of how a QLAC might work for you, please click here.


[1] QLACs can be purchased using funds from other tax-qualified savings vehicles such as IRC Section 401(k), 403(b) and 457(b) accounts.  No “Roth” accounts are eligible for QLAC purchases.   Herein, when we use the term “IRA”, it is implied that the same conditions and terms apply to the other accounts.

[2] The maximum premiums are a function of the IRA (or IRAs) asset balances.  Collectively, the limit is 25% of IRA assets or if less, $125,000. 

[3] Married couples can be designed as joint beneficiaries at the policy owner’s election.

[4] IRC Section 401(k) accounts have some unique exceptions which can allow distributions to be deferred past age 72.

[5] At inception, a buyer can elect a QLAC policy form that returns a minimum of the premium invested to the policy owners’ estate.  That amount is reduced by any benefit distributions received by the QLAC owner.

[6] IRA distributions are treated as fully taxable.  This treatment is the flip side of the IRS permitting contributions to IRAs being tax deductible. Very rarely, there can have been non-deductible contributions to an IRA.  Distributions relative to these contributions require special treatment.



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