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


A No-Regrets Retirement Guide for Procrastinators

 It is utterly false and cruelly arbitrary to put all the play and learning into childhood, all the work into middle age, and all the regrets into old age.  -- Margaret Mead

In your fifties or sixties? 

If you’re like most people our age, you may have a regret or two. 

Research by Cornell Psychology Professor, Thomas Gilovich, shows what we regret most in life is not the mistakes we’ve made in the past. Instead, the things we didn’t do produce the most regrets. It turns out that we regret the most are the times we failed to act.

Regrets and Retirement Planning

Nowhere is this truer than in retirement planning. For most of us, our regrets span both saving for retirement (never enough) and failure to manage our retirement once it has started.  

Rare is the individual who can say that they have it completely together in planning and managing their retirement.  If you feel this failure applies to you, it turns out you are in good company. A 2018 Northwestern Mutual study found that 21 percent of Americans of all ages have nothing at all saved for the future. Another 10 percent have less than $5,000 saved for their golden years. A 2017 study by Government Accountability Office (GAO) analyzed retirement savings.  The study found the median retirement savings for Americans between age 55 and 64 were $107,000.  The reasons for our nation’s savings shortfalls are as varied as people themselves. Examples include: 

  • Failure to get into the retirement savings habit;
  • Unexpected and uninsured loss of an income provider;
  • Divorce; 
  • Protracted family illnesses; 
  • Education expenses or debt; 
  • Investments that have gone awry. 

Professor Gilovich would tell us that no matter what the reasons are, they don’t matter now. What is important is what happens next. Professor Gilovich advises that we tackle our potential future regrets head-on. “As the Nike slogan says: ‘Just do it’; Don’t wait around for inspiration, just plunge in. Waiting around for inspiration is an excuse. Inspiration arises from engaging in the activity.”

How to “Just do it” for your retirement?

What follows is a short guide to “just doing it.”

1. Start by calculating retirement assets and income. Your first step should be to look at your financial situation with the long view in mind. First, add up your existing assets. Factor in social security (click here to see the social security administration’s benefits estimator). The benefits estimator tool may provide you with some important insights into how long you will want to keep working. For example, while you may start to receive Social Security at age 62, you should study your options. The Social Security Administration pays a smaller benefit to people who begin receiving payments at age 62. It pays more, for example, to people who wait until age 66 or age 70. If you enjoy what you are doing, are in good health, and can keep working, you may enjoy receiving benefits later. Indeed, Social Security benefits increase every month you do not take them until you reach age 70. After a retiree’s 70th birthday, there is no economic benefit for continuing to wait. For more on this topic go to the Social Security Benefits Planner. You may also find useful an article about the tradeoffs between taking early and late distributions in this article by the Motley Fool.

2. Project Living Expenses in Retirement. You need to look at what you are going to need in retirement to cover your expenses.  Be sure to include rent, food, medical expenses and other costs of day-to-day living. If there is a shortfall – and there is for many of us – don’t panic.  No matter how small your savings is now, the most important thing you can do at this stage is to begin. Start by projecting what your expenses are. 

3. Start Problem-solving. Here are some examples of places in your budget where you can find money:

a. Save on Housing Expense. A smaller home or apartment may make sense now.  Many of us with grown children live in houses that are far too large for our needs.  Moving to a smaller home in a different state, county, or even a school district can be liberating. Such a transition can mean less monthly living expense and less day-to-day maintenance. Often, the result is a net improvement in the quality of life.

b. Save on Debt. This time of life is often a great time to pay off credit card debt built up over the years.  Helping your kids through their various stages in life can create credit card debt.  Debt consolidation either using home equity or other forms of credit can make sense. Also, it may be a good time to explore refinancing to a 15-year mortgage. A fifteen-year mortgage may move you to a net higher payment. Paying off your mortgage in your fifties and sixties paves the way to rent-free living in your seventies and eighties. Even more enticing, after age 62 a reverse mortgage becomes an option. 

c. Save on Day-to-day Expenses. Don’t be ashamed to grab senior discounts, they are everywhere. Look for them in grocery stores, movie theaters, ballparks, hotels. Finding and using these discounts can become a part of your routine. To get you started, here is a list of senior discounts

d. Consider Small Investments that Reduce Your Living Expenses. For example,  you can reduce your electricity costs. Many states provide incentives for residential investments in solar power and geothermal heating and cooling. The Federal Government also provides an investment tax credit for these kinds of investments.  Start a garden. If you spend a lot of money watering on your property, a humble rain barrel can provide decades of savings on irrigation.

e. Consider Working Longer. For those who are able, keeping working post-retirement is a sensible way to fill up the savings tank. This may mean a transition to a second career which may be different from what you pursue in the present. For example,  after working many years in larger companies, you may move to more entrepreneurial endeavors. Self-employment means never having to face mandatory retirement! Whatever you choose, remember that you have many, many life skills you can leverage.

f. Increase Retirement Savings as You Can. There is good news from the US government. Believe it or not, Uncle Sam has created incentives for you to save in your later years. Provisions for retirement planning procrastinators include “catch-up contributions.” The catch-up contribution provides for accelerated retirement savings after age 50. The limit for employees aged 50 and over who take part in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan (2019) is $6,000. The catch-up contribution limit for individuals aged 50 and over to the Individual Retirement Plan is $1,000. To learn more follow the link to IR-2018-211 released by the Internal Revenue Service on November 1, 2018.

g. Reduce your Medical Expenses with Medicare. If you are within three months of your 65th birthday, you can sign up for Medicare. Medicare is the national health insurance program for people age 65 or older. Part A helps pay for inpatient care in a hospital or skilled nursing facility. Part B helps pay for doctors’ services and many other medical services. Most people age 65 or older are eligible for free Medicare hospital insurance (Part A) if they have worked and paid Medicare taxes long enough. You should sign up for Medicare hospital insurance (Part A)  3 months before your 65th birthday.  Sign up even if you do not want to begin receiving retirement benefits at that time. Anyone who is eligible for free Medicare hospital insurance (Part A) can also enroll in Medicare medical insurance (Part B).  You enroll in part B by paying a monthly premium. Some beneficiaries with higher incomes will pay a higher monthly Part B premium. If you do not choose to enroll in Medicare Part B and then decide to do so later, your coverage may be delayed and you may have to pay a higher monthly premium. To learn more about Medicare, follow this link to the Social Security Administration’s Medicare Page

h. Postpone Income and Required Minimum Distributions. As of January 1 2020, retirees who reach the age of 72, have until April 1 of the next year to take their first Required Minimum Distribution (RMD) from their qualified retirement plan(s).  They have until the next December 31 to take their second distribution. Those individuals whose employer retirement plans allow it and who may continue to work after their 72nd birthdays may wait until the year they retire to take their first Required Minimum Distribution. For more on this topic see the IRS Topic Page on Required Minimum Distributions

i. Use a Qualified Longevity Annuity Contract (QLAC) to Cover Income Needs in Later Retirement Years. For many, retirement funds are limited. If you are concerned about outliving your retirement assets, a QLAC is a great way of assuring yourself income later in retirement.  QLAC income must begin before you reach your 85th birthday but can last for the rest of your life. Click here to watch a seminar by QLACguru Ray Ryan describing this strategy then try our Failsafe (sm) Maximize Income Calculator to see how this strategy might work for you.

j. Mark your Calendar. Retirement is not a single event, but a process to be managed. To get started, follow the link to Calculate the important future dates of your retirement. Start studying your options and setting goals.  Be prepared to address each of the milestones as they arise at age 50, 55, 62, 65, 70 and 70 and one-half. 

Once you’ve done this homework, it may be time to hire on a financial advisor to help you grow your assets. But pick her or him carefully. Like Charles Barkley, you need to, “take the shame out of your game.”   Never allow a prospective advisor to ridicule the size of your portfolio. If he or she does, find another who won't.

After all, it’s not about what you have now, but what you can have in the future.  

Welcome to the next 30 years of your life!

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.

Who Should Buy a QLAC (And Who Should Not?)

 Introduction

Who should consider buying a Qualified Longevity Annuity Contract (a “QLAC”)?  Who should not? 

A QLAC is a general account annuity that meets tests established by the Internal Revenue Service (“IRS”) in 2014.  The QLAC’s start date can be as late as the buyer’s 85th birthday.  The annuity payments continue for the life of the buyer (or the buyer and spouse). In this respect, the distributions are somewhat like social security benefits, except they start later. A QLAC premium (A Cap is described below) is withdrawn from a traditional IRA[1] without triggering a taxable distribution.  The IRA asset account is reduced by the premium distribution for purposes of computing the Required Minimum Distribution beginning at age 72.  Because the QLAC premium distribution was not taxed, the QLAC annuity payments are all taxable upon receipt.  (Please try our RMD and QLAC annuity benefit calculator to see how this works.)

Why Not Buy a QLAC?

At the latest, planning for retirement should begin in one’s early sixties or at least sometime during the decade after that. Some people will not be concerned about running out of savings during their retirements.  Below are examples of persons who are unlikely to be QLAC buyers:

  • A beneficiary of a defined benefit plan that provides a large, fixed benefit for life;
  • An owner of defined contribution plans (401(k)s, IRAs, etc.) with combined asset balances more than $1.5 million;
  • An investor with a portfolio of assets that generate adequate income to meet retirement living expenses;
  • An individual whose retirement planning focus is about to whom her estate will be distributed; and
  • A person with a limited life expectancy due to a disability or illness.

It is hard to imagine any of the above persons buying a QLAC unless their focus is purely on tax deferral.  

Who Should Consider Buying a QLAC?

There are many more who should consider a QLAC in their retirement planning. Examples of people who look into a QLAC include:

  • An owner of defined contribution plans (e.g., 401(k)s, IRAs) with combined asset balances less than $1.5 million and who has no defined retirement benefits;
  • Someone concerned about becoming a burden to his or her children during retirement; 
  • A taxpayer whose social security benefits will be a material part of his or her retirement income;
  • A person with no assets outside a home and defined contribution savings; and
  • Someone in good health and with a family history of longevity.

 Fear of out-living one’s assets is the common concern of people in this second group.   Social security benefits, in of themselves, fall short of their living cost in retirement. Further, most do not want to ask for financial help from their children or other relatives.   As a result, they want to find a way to make their savings last for life.

A QLAC addresses this concern by creating a lifetime cash flow starting before age 85. With a QLAC purchased say 15 years earlier, the annual benefit can equal anywhere from 25% to 35% of the premium.

To date, QLACs sales have not caught up to the need in the marketplace. Why?  The product is less than four years old. Many future and current retirees are not aware that QLACs exist.  Others have heard of QLACs but from a party with a vested interest in maintaining funds under management who have made a negative comment.  Below are criticisms and rebuttals.

Life Expectancy

Here, an argument is made that a retiree can make his funds last for her life expectancy. As previously noted, projected mortality is part of the criteria in deciding whether a person is a QLAC candidate. People with terminal diseases have short life horizons. Others, with less cloudy futures, ask, “How long can I expect to live?” The only way to answer the question is to look at an actuarial table. Still, it is essential to look at the right table.

          2016 Table for a 65-Year-Old  Sex                    Life Expectancy

          Social Security Administration      Female             21.6 years (i.e., age 86.6)

          SOA Annuity Table for 2016          Female             25.1 years (i.e., age 90.1)

For retirees with savings, the Society of Actuaries table is the right choice.  Longevity has been shown to correlate with income and savings.  The Social Security table includes low-income earners and those who have failed to save. The Society of Actuaries table focuses on a more narrow mix.

The definition of, “Life Expectancy” is also important.  The term does not mean that a group of like-aged (a “cohort”) females will all die when they reach their life expectancy (e.g.,. age 90).   Instead, it means that of an original cohort, 50% of the group will be deceased and 50% will be alive when the survivors reach age 90.  Further, the Society of Actuaries predicts that at age 100 10% of the original cohort (i.e., 20% of those alive at age 90) will still be with us.  At age 105, about 1% will still be living.

Of course, on average males die before females. The Society of Actuaries predicts a male age 65 has a life expectancy of about 23 years.  The slope of the male mortality curve follows the female curve – 10% of the males make it to age 98. 

Life expectancy increases when the actuaries compute the survival probability for at least one of a married couple (born on the same day).  At age 65, that life expectancy becomes 29 years or age 94.

So, it is incorrect to predict that savings need only last to one’s life expectancy.   There is a reasonable chance that each of us may live ten years or more past our actuarial life expectancy.  Indeed, life expectancy has been growing and will continue to increase as medical treatments improve.  No matter how long it may be, providing for the tail end of life is what a QLAC is all about.

'Bad Investment' or Good Insurance?

Some money managers have branded a QLAC (and other life annuities) as bad investments. Still, a QLAC is not an investment – it is an insurance contract.  It pays no matter how long you live.  It does not pay after you die, i.e., when you no longer need the money.

Analogies abound. Social security is an example, although it is a mandatory government-sponsored plan.  On every payday, the employee and the employer pay into the social security trust fund.  After retirement (for social security purposes), each month a social security distribution is paid to the former employee – until he or she dies.  If an individual dies before benefit eligibility, their estate receives nothing – there is no refund of social security taxes previously paid to the government.

The same logic applies to defined benefit pension plans sponsored by private employers.  The plan sponsor contributes to the pension plan fund, and after retirement, the program pays a scheduled benefit – until he dies. An early death does not trigger a plan refund to the employer or the employee.

To summarize, a QLAC converts a portion of retirement savings from a defined contribution plan into a defined benefit plan. That conversion is what creates peace of mind for QLAC buyers - they have covered their late in life living costs no matter how long they live.

Early Death Refund

Unlike social security or a defined benefit pension plan, QLAC buyers can elect a Return of Premium (“ROP”) policy option.  This election provides that when a beneficiary dies, the cumulative distributions have to equal at least the premium paid.  For example, assume a QLAC premium of $20,500 and a scheduled benefit of $5,000 per year.  If the QLAC owner dies after collecting two years of $5,000 ten, then his or her estate will receive a ROP check for $10,500. 

There is an intuitive appeal to getting your money back with a ROP election. Still, the annuity benefit amount is reduced when a ROP election is made. It pays to examine annuity benefits with and without ROP to examine the tradeoffs.  Remember, a QLAC is about not being a burden on your children – a QLAC is not about creating an estate for children to inherit.

'Equities Are Better?'

From time to time, a money manager may argue that the stock market’s long-term rate of return is 10%.  For example, they will assume an annual 10% return on savings (the return rate does not apply to a QLAC) and the same retirement distributions with or without a QLAC. The basket without a QLAC will out-perform the basket with a QLAC.  The problem with this analysis is that the money manager will not and cannot give the IRA owner a guarantee that his recommended investments will generate a consistent 10% rate of return. Equities can be volatile – up and down. Long-term averages do not pay bills when the stock market declines 10% or 20% in a year of retirement. (Please see our article about the challenges of Sequence Risk for more on this concern.)


Insurance is a product for people who cannot afford a given risk or loss.  A car owner buys collision insurance because she cannot afford to replace her car. A QLAC buyer is doing the same thing – she cannot afford the loss of income in her later life.

No QLAC Surrender – Longevity vs. Liquidity

The IRS QLAC regulations state that the policy cannot have a surrender value.  The QLAC contract is irrevocable.  Once the premium is paid and the contract is delivered, there is no going back.  While reducing the flexibility of the contract for the buyer, this provision enables the carrier actuaries to create the highest payouts.  If the risk of surrender were a factor, the annuity payments would be much lower. (Consider the effect of the ROP election discussed above.)

To be sure, a QLAC is not a liquid asset.  A QLAC should not be used to fund discretionary spending. Instead, the focus should be on funding the projected annual cost of living.

Also, note that the IRS created a maximum lifetime QLAC premium per participant.  The QLAC premium(s) cannot exceed the lesser of $135,000 or 25% of the IRA fair market value (the “Cap”).  After a QLAC premium withdrawal, 75% or more of their IRA assets remain to invest in stock or bonds. To meet living expenses, the owner can withdraw from the IRA before the QLAC annuity start date.  For most retirees, these withdrawals can equal the future QLAC annuity amount. Also, the withdrawals can continue until the QLAC annuity start date[2].

Carrier Ratings & Persistency

Insurance companies issue QLAC contracts.  After the initial deferral period of 10 to 20 years, the underwriter will be paying benefits for decades after that.  This payment stream is like a corporation issuing a bond for 30 to 40 years, except there is no defined termination date with a QLAC. 

How secure is the carrier’s promise to pay? There are over a dozen top insurance companies that offer QLACs.  Without exception, each one has a long history and has high industry ratings.  (See our carriers page to see the year founded and AM Best's ratings of leading QLAC carriers.)  Other than tax rules, there is no federal government oversight of the insurance industry. Instead, the states regulate and license the insurers.  The states collect premium taxes where the insurance companies do business.

To date, carrier bankruptcies have been rare. When a carrier did become insolvent in the past decades, the state’s insurance department took control of the company. During the rehabilitation, the regulators' primary goal is to protect the policy owners. Often, the solution is to move policies from the distressed company to another and stronger carrier.  Essentially, the state insurance regulators is a performance guarantor of the carrier’s they regulate.

Silk Out of Sow’s Ear

Unfortunately, the old saying -No Silk out of Sow’s Ear – applies to QLACs.  If there are minimal savings in someone’s IRA, there is no way to convert 25% of a small number into a big number.  There must be available savings to purchase a QLAC - which generates a useful future annuity.

If a person wants to buy an immediate annuity[3], a QLAC should not be on the shopping list.  QLACs are only available as deferred annuities. QLACs perform best when the deferral period is ten years or more. Also, QLACs shine when the annuity start date is on or after the 80th birthdate of a QLAC owner. Three-quarters of one’s savings should be able to get a person to their 80th birthday or later. The purpose of a QLAC is to insure against longevity risk.


Summary

A QLAC is not for the person with no concern about running out of assets or savings during his or her lifetime. He or she does not have a risk to insure.

A QLAC provides income certainty during the later years of retirement.  Its distributions are for life.  This deferred annuity typically starts at age 80 or after.  A QLAC premium can be funded by a traditional IRA without triggering taxation of the allowed withdrawal. The amount of withdrawal cannot exceed 25% of retirement assets.  The limit is $135,000.

Candidates for a QLAC are those individuals that may outlive their savings. Most QLAC buyers have a reasonable expectation to survive well into their late 80s or 90s.

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 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] In addition to an IRA, other Internal Revenue Code accounts can be used to fund a QLAC.  These are known as 401(k), 403(b) and 457(b) tax-qualified savings accounts. Herein, references to an IRA are meant to include the other three tax-qualified accounts.  Further, a Keogh savings account is not eligible for a QLAC withdrawal.

[2] The projection assumption is that IRA investments do not lose money in any withdrawal year. Each year can show a zero rate of return and still provide adequate withdrawals as described above.

[3] When annuity distributions begin within 12 months of the premium payment, the annuity is labeled as “immediate.” 


A Women Over 60? Here's Why A QLAC May Be Your Best Friend

By Betsy Ryan and Ron Ryan

Are you old enough to remember, “Diamonds Are a Girl’s Best Friend?” The song is from the 1953 Musical, Gentlemen Prefer Blonds starring Marilyn Monroe?[1]

The French are glad to die for love.
They delight in fighting duels.
But I prefer a man who lives
And gives expensive jewels!
A kiss on the hand.
May be quite continental,
But diamonds are a girl's best friend!

A kiss may be grand,
But it won't pay the rental
On your humble flat
Or help you at the automat.


Source: Marilyn Monroe - Diamonds Are A Girls Best Friend Lyrics | MetroLyrics 

Here is why these lyrics are relevant even today – more than 50 years later.  The average life span in America is growing, and women are living much longer than men.  A 2014 longevity study[i] predicts a 60-year-old woman has a 32 percent chance of surviving to age 90. If a woman celebrates the 80th birthday, there is a 42 percent chance of living to 90! A husband’s survival rates are much lower than those of his like-aged wife.  A woman's chances of outliving her husband at age 60 are a whopping 57 percent. [ii] Social Security actuaries developed these observations from the entire social security database, which includes the whole United States population.  If you are a 60-year-old woman who does not smoke and are generally in good health, the probability of outliving your spouse is even higher than the above percentages.

How to pay for all those Golden Years? 

In retirement, a QLACs may be - to borrow from the song -  “A girl’s best friend.” Here are a few basics:

  • A QLAC stands for Qualified Longevity Annuity Contract.
  • Available only since 2014, a QLAC provides a pension-like stream of annuity payments in the later years of retirement. 
  • A woman may buy a QLAC today, lock in lifetime monthly income starting at a future date of her choosing.
  • A QLAC allows her to defer benefit payments until age 75, 80 or 85 -- or anywhere between. The longer she waits for the payout, the higher the QLAC’s benefit payment. 
  • An IRA owner may buy a QLAC with IRA assets without incurring a tax penalty. She can use the lesser of 25% percent of IRA assets or $135,000 out of her qualified retirement account to buy a QLAC.  (For 2020 and after, the maximum QLAC limit increases from $130,000 to $135,000.)
  • The IRS calculates this limit per individual taxpayer. If both a woman and her spouse have IRAs, each may buy a QLAC.
  • Until benefit payments start, no required minimum distributions are payable on the QLAC assets. So, she defers taxes on whatever money she put into her QLAC.

Once the annuity starts, QLAC benefits will continue for as long as she lives.    Benefits will continue while she is alive -- even if she lives to age 100 or older. 

R-E-S-P-E-C-T Might Mean Q-L-A-C!

High net worth individuals do not often worry about running out of assets in retirement. They can use the so-called  ‘four percent rule’ to liquidate their portfolios.   With smaller portfolios (e.g., IRA assets between $100,000 and 1 million dollars), that 4% rule does not make sense. A Qualified Longevity Annuity Contract is an excellent alternative strategy. A QLAC can provide a reliable stream of payments throughout even the most extended retirement.  Indeed, a QLAC can outlast diamonds, gold, and stocks, and bonds, and (probably) your husband.  Although they have different start dates, social security and QLACs share the common attribute of payments for life to the beneficiary – even if that period is the next thirty or forty years.  

Now, before you go out and buy a QLAC, here are a few things to consider:

  • A QLAC is irrevocable. Once purchased, you cannot get the money back from a QLAC -- until it compensates you in the form of benefits. To make sure you get your premium amount back, you can buy the QLAC with a so-called “return of premium" rider.  A return of premium rider is a kind of death benefit. The benefit will pay your estate any unreturned premium in the event of death. Be aware that such riders come with a reduction of lifetime benefits.
  • A QLAC Payout Is Fixed. One of the main advantages of a QLAC is that it allows you to know today what you will receive in the future. If you think inflation is a risk, you can buy a rider that guards against inflation.  As with a return of premium rider, a cost/benefit tradeoff exists for the Cost of Living Adjustment (COLA) rider as well.  You should study the alternatives.
  • A QLAC is a life annuity issued by an insurance company.  Because of the “for life” feature, a QLAC is more like social security benefits than it is like investing in stocks or bonds.  As a result, the rates of return are low if the beneficiary dies early and high if the beneficiary is long-lived. One comprehensive study has shown that life annuities, in general, are the best choice for individuals funding for their essential living expenses for the duration of their retirement. The stock or bond alternatives run “sequence risk” or the devastating outcome of incurring investment losses in the early years of retirement.  Stocks and bonds are appropriate for individuals funding lifestyles (e.g., around the world trip), legacies for heirs and buffer assets for the unexpected. A QLAC is an assurance that there will always be a check to cover one's retirement living expenses.
  • A QLAC reduces your asset-based advisor’s compensation. Is your retirement portfolio managed by someone compensated based on assets under management? If so, don’t expect that manager to support the idea of a QLAC. A QLAC will reduce their compensation by up to 25 percent.  Be sure to review a QLAC investment with a genuinely objective advisor.
  • As with Diamonds, Be Sure to Choose A Real One! A QLAC is a type of Deferred Income Annuity, but not all Deferred Income Annuities are QLACs. Also, a QLAC is not a variable or index annuity.  Both those types of annuity have their performance tied to the stock and bond markets.  (Variable and Index annuities pay much higher compensation to the seller.)  A QLAC is designed and sold by the life insurance carrier as a Qualified Longevity Annuity Contract.

The QLAC was created by IRS regulation to help seniors who are living longer. Below is a summary of QLAC required features:

  • Must be a life annuity – single or joint with a spouse;
  • Must be a deferred annuity starting no later than age 85;
  • Only defined contribution account funds (e.g., IRA) may be used;
  • Roth accounts and large pension plans cannot participate;
  • The 25%/$135,000 premium limit applies to each;
  • No surrender values, but Return of Premium election is allowed;
  • The annuity cannot be variable or otherwise indexed to a market;
  • Annuity benefits are backed by the good faith and credit of carrier;
  • Up to the specified limited noted above, withdrawal from the retirement account to fund the QLAC (e.g., IRA) is not taxed;
  • Withdrawals do reduce plan (e.g., IRA) assets for RMD computations;
  • QLAC Annuity deferred payments are 100% taxed when received, but this will occur in the future when you are likely to have less income.

QLACs and Diamonds?

Every woman over sixty may want to consider a new ‘best friend’ in addition to her diamonds. She should take a proactive look at retirement assets with an eye for the long term. Later in life, a QLAC may be a “girl’s best friend.”

 

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 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.

   

 

[i] See https://www.ssa.gov/OACT/NOTES/as120/LifeTables_Body.html

 


[1] Modern entertainers from Madonna to Beyoncé have borrowed from this iconic production.  While no doubt anachronistic, the song does raise a vital challenge -- how to pay the rent in our later years!  

 


How to Minimize RMD

Many people are surprised to learn that they have to take Required Minimum Distributions (“RMDs”) when they reach the age of 72.  The RMD rule applies to IRS sanctioned retirement savings plans (“Plan” or “Plans”).  These Plans have names like an IRA, a 401(k), 403(b), 457(b) and other acronyms.  Contributions to these traditional retirement savings Plans are made with “pre-tax” dollars – an individual taxpayer’s Plan contributions are reductions in that person’s gross taxable income.  Also, an employer’s Plan contributions are not taxable to the employee.  Even better, assets in each Plan can grow free of income tax.  Of course, the IRS eventually wants tax revenue. So, all distributions from these traditional retirement Plans are taxable to the Plan beneficiary/recipient. 

Some retirees can maintain their lifestyles without withdrawals from their IRA or similar Plan.  Given the wealth-creating power of compounding returns without tax, these retirees often want to allow their Plan assets to grow tax-free as long as possible - without taxed distributions.  Unfortunately, the tax rules specify an annual Required Minimum Distribution (“RMD”) for all “Traditional” Plans.  The RMD rule applies once a person reaches age 72 and each year after that.   An RMD distribution shortfall is subject to a 50% penalty as well as the regular income tax.

Careful tax planning can assure that there are annual withdrawals from a Plan at least equal to the RMD.  But can a taxpayer reduce or eliminate the RMD exposure to maximize the benefit of tax-free compounding?  The answer is yes, but it takes planning and the right facts.  Below are some approaches.

ROTH 401(K) PLAN

Plans with a “Roth” in their title have tax treatments that differ from Traditional Plans.  Contributions are treated as taxable income or not deductible, but distributions are tax exempt.  Many if not most employers (offering 401(k) plans) give the employee the option of having a Roth or a Traditional 401(k) Plan.  As a result, today there are many billions of dollars in assets held in Roth 401(k) plans.   The RMD rules are the same for both Traditional and Roth 401(k) Plans. 

Here, there is a simple solution to the RMD problem.  A Roth IRA has no RMD requirement ( the Traditional IRA is subject to RMD).  A Roth 401(k) plan can be rolled over into a Roth IRA without creating taxable income.  Absent some extraneous factor; all Roth plans should be transferred to a Roth IRA before the RMD rules apply.  Of course, the rollover will have to occur when an employee has the authority to transfer the account, usually after leaving employment with the plan sponsor.

TRADITIONAL PLAN ROLLOVER

Can a person roll over to a Roth IRA if he or she holds assets in a Traditional Plan (e.g., 401(k) or IRA)?  The short answer is “yes,” but there are two hurdles to a rollover from Traditional to Roth:

  • The rollover amount is taxed as ordinary income in the rollover year.
  • No distributions from the Roth IRA can occur for five years after the rollover.

The rollover amount can be less than the total Traditional Plan asset balance.  Any distributions needed for the five years after the rollover should be held back in the Traditional Plan. After the fifth year, the Roth IRA is free to make some or no distributions to its beneficiary.

An individual’s tax situation dictates whether or not this rollover strategy makes sense.  For example, assume a person will be in a high tax rate at the rollover date and expects a low or no tax in a future distribution year.  A rollover in this example would be inappropriate.   The ideal time to do a rollover is in a year when an individual’s taxable income is unusually low.  Such a person might be between jobs, early retirement before benefits are paid, report deductible passive losses from real estate investments, etc.   Also, it is possible to plan multiple rollovers to multiple Roth IRAs over the years.  The rule is to do the rollover in a tax year when rates are low, or there are sufficient losses. Even more important – run the numbers and do a sensitivity analysis on both assumed tax rates and investment rates of return.

Here is an important point.  If the rollover into a Roth IRA occurs when the RMD rules apply, an RMD distribution will still be required in the rollover year.

There is no age restriction on a Plan roll as far as income taxes.  Still, the Plan’s language must allow the event.   For more on how to manage lifetime income using a Roth IRA, see our blog article on the topic.  

PLAN TERMINATION

A simple way to avoid RMD is to terminate the Plan before the beneficiary reaches age 72.  Generally, a penalty is triggered by a termination or Plan distribution before age 59½.  After age 59½, the beneficiary of a Traditional Plan is free to withdraw any amount so long as it equals or is greater than the RMD for that year. Withdrawal of all Plan assets will terminate the Plan.  Please recall that Traditional Plan withdrawals are taxed as ordinary income.

Just like with a rollover to a Roth IRA, distributions should be planned to occur in the year(s) when the Plan beneficiary has low or no other taxable income. So doing, the tax cost of the distribution(s) will be minimized.    Once received, the funds can be reinvested by the Plan beneficiary in his capacity as an individual investor.  The tax-advantaged choices are many – non-dividend paying stocks, deferred annuities (variable or general account), real estate, oil & gas, etc. Tax deferral depends upon the nature of the assets selected for re-investment.

A QLAC

If a person owns a Traditional Plan, the IRS has created a new type of qualified tax annuity – the Qualified Longevity Annuity Contract (“QLAC”).  The IRS authorized this new class of annuity contract in 2014 to help taxpayers of more modest means to assure themselves that their Plans would never run out of money.  Under the IRS rules, a QLAC must have the following attributes: 

  • The annuity must be deferred and not be an immediate annuity;
  • Once payments begin, the annuity is for the remainder of the beneficiary’s life;
  • The annuity must start no later than the owner’s 85th birthday;
  • The policy must be a “general account” insurance product – not variable;
  • The owner and a spouse may be joint beneficiaries;  and
  • The maximum QLAC premium is the lesser of $130,000 or 25% of Plan assets.  (The $ 130,000-lifetime limitation was increased to $130,000 from $125,000 on January 1, 2018, and will rise from time to time after that.)  
  • There are two significant benefits of buying a QLAC: 
  • Taxable income does not arise from a Plan withdrawal if used to pay a qualified QLAC premium;
  • The Plan assets are reduced by the premium withdrawal for computing RMD.

 It is important to recognize that a QLAC is an annuity, a form of insurance policy – not an investment contract.  A QLAC guarantees a fixed income for the life of the policy owner (and spouse, if elected).  There is also an available election that provides that the sum of all payouts must be equal to the premium paid.  Assume a QLAC was purchased for $125,000 with the annuity to begin at age eighty-five.  If the QLAC owner dies at age eighty, then his estate will receive $125,000, a refund of the premium paid.  (Without the return of premium election, there would not be benefits payable to the beneficiary’s estate ).  As a result,  a conservative analysis assumes that the QLAC return is 0% but never negative. On the other hand, the RMDs are reduced because the Plan assets are reduced by the distribution to pay the QLAC premium.  As a result, the beneficiary has more pre-tax dollars at work.  

The benefit of a Plan without a QLAC withdrawal is that there are more Plan assets which can grow tax-free inside the Plan – but higher RMDs.  Of course, without a QLAC, all the Plan assets are subject to investment risk.

Increased Plan distributions have distinct tax disadvantages.  Funds moved outside the Plan are taxed 100% as ordinary income - thereby reducing available re-investment assets.  Further, the remainder assets typically generate taxable income, further reducing asset growth. 

Once again, there is no one best answer concerning the above tradeoffs.   For each person, the right answer depends on the assumed tax rates, when the QLAC annuity begins, and the expected rates of return inside the Plan - as well as the rate of return on the invested distributions.  The QLAC can be an “investment” when the return of premium election is made.  As part of a portfolio of invested assets, the QLAC could be categorized as low or no risk while the assets in the Plan might be at incrementally higher risk than without the QLAC.  Finally, for many investors, there is a very important ‘sleep at night’ factor of knowing that a well-rated insurance carrier guarantees a certain part of future retirement income. 

CHARITABLE CONTRIBUTIONS

Once the RMD age is reached, a Traditional IRA can make a qualified charitable contribution up to $100,000. (To take advantage of this option, other Traditional Plans need to transfer assets to the IRA.) That contribution is treated as an RMD distribution for purposes of the RMD test but is not treated as taxable income to the Plan beneficiary.   For all intents and purposes, the IRS is assuming that the distribution’s imputed income and charitable deduction offset and neither need be reported.

Of course, instead of having the IRA make the contribution, a beneficiary could take a $100,000 distribution and turn around and make a $100,000 charitable gift.  For high-income individuals, there are disadvantages to this alternative approach.  First, the individual’s Adjusted Gross Income (“AGI”) will be increased.  A variety of tax rates kick in at higher levels of AGI.  Also, some personal deductions are limited as AGI becomes higher.   For example, itemized deductions (i.e., contributions to charities) are reduced when AGI exceeds certain thresholds (e.g., $155,650 if married filing separately).  For most high-income taxpayers, the net effect will be more taxes to pay under this second approach than if the beneficiary had simply instructed the IRA to make the charitable contribution.

A beneficiary’s charitable intent is the starting point of this RMD minimization strategy.  Having the IRA fulfill that intent is just a better way. Note that the $100,000 is a maximum only.  For Plans with less than $2.5 million in assets, typically, the RMD amounts will be less than the $100,000.   While a Plan could limit its charitable transfer to RMD, the charitable gift by the IRA could be less or more than the RMD – just not more than $100,000 in a given year.

An interesting approach might be to use a QLAC to reduce the Plan assets and after that, dedicate the reduced RMD to charitable gifting.

ANNUITIES

Buying an annuity such as an Immediate or Deferred annuity inside a Traditional Plan may achieve planning objectives, but these purchases are not a means of reducing RMD.  (A QLAC is not a traditional annuity and should not be confused with the annuity contracts described below for this discussion.) 

An Immediate annuity (annuity payments begin within 12 months of the purchase date) distribution is often treated as a deemed RMD.  The annuity distribution is 100% taxable to the beneficiary.  The Immediate annuity is great for the person who seeks a risk-free return and lifetime income. 

A Deferred annuity (annuity payments begin after 12 months of the purchase date) has another issue.  Unlike an Immediate annuity, the Deferred annuity has a cash value designated by the annuity contract or imputed by the IRS.  As a result, RMD will be computed each year based on that cash value.  Sufficient liquid assets need to be held in the Plan but outside the Deferred Annuity to assure there are available distributions to cover the computed RMD.  Once the annuity begins its payments, the payouts are typically deemed equal to the RMD.  This approach offers little or no opportunity to defer RMD.

Traditional annuities are not vehicles to accumulate assets tax-free inside a Plan.  Any tax deferral inside the annuity becomes irrelevant when the asset is held inside a Traditional or a Roth Plan.  Avoiding RMD is a strategy to allow assets to grow tax-free typically for a future beneficiary.  Annuities are about providing secure lifetime cash flows to the Plan beneficiary.  

 SUMMARY

Avoiding or minimizing RMD is for future or current retirees who do not or will not need their savings inside a Traditional Plan. A Plan that buys an Immediate or Deferred Annuities will not help reduce the RMD and will likely reduce or eliminate residual assets at the end of the beneficiary’s life.

Good Planning tools include distributing Plan assets to buy a QLAC, moving some or all of the Plan assets into a Roth IRA, distributing Plan property at an opportune time and fulfilling charitable gifting via a traditional IRA. The QLAC has no tax toll charge on the transfer from a Plan, but it is limited in the percentage of assets that can be used to pay a QLAC premium.  Transfers from a Tradition Plan to a Roth IRA (or simply outside the Plan) are 100% taxed, but that tax can be managed by doing one or more transfers in low tax rate year(s).  Finally, making charitable gifts from an IRA reduces RMD and is tax efficient for high-income taxpayers.

There is not a perfect solution for all.  Instead, minimizing RMD requires thoughtful planning with a keen eye focused on the beneficiary’s objectives and not just tax minimization.

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 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.



A Failsafe Roth Plan

A FAILSAFE ROTH PLAN

In decades past, most employer pension plans fell into the category of a Defined Benefit Plan (“DB plan”).  That is, when an employee retired as a beneficiary of a DB Plan, he or she received a monthly payment for his or her retirement life span.  The DB plan payment amount was determined by formulas driven by the employee’s length of service and compensation while working for the employer.  The employee benefit was independent of the pension plan’s financial performance or the plan’s investments. 

Today, the numbers of DB Plans have declined dramatically and have been replaced by Defined Contribution Plans (“DC Plans”).  Defined benefits are not part of a Defined Contribution Plan – the available distributions from a DC Plan are determined by the magnitude of contributions and the plan’s earnings.  Once a Defined Contribution Plan beneficiary retires, there are minimum withdrawal rules, but nothing that prevents a beneficiary from making withdrawals such that DC Plan assets are fully spent or depleted before that retiree dies.  The major shift from DB Plans to DC Plans in the USA coupled with lower average returns, poor savings rates, higher healthcare costs, and greater longevity has created a nation worried about running out of money during retirement.   

In a prior blog article, we described an approach that guarantees that an IRA Plan beneficiary will not outlive his or her savings.  That approach is the “Failsafe Strategy.”  To implement the strategy, a person with a traditional Individual Retirement Account (“IRA”) (or other qualified DC Plan) divides his IRA assets into two “buckets.”  The first bucket distributes a fixed annual amount from the IRA from the start of retirement to a future annuity start date (e.g., between ages 70 to 85). At the end of the first bucket’s tenure, there can be few or no assets in the IRA. The second bucket is a Qualified Longevity Annuity Contract (“QLAC”) that pays an annual benefit (e.g., starting at age 85) for life.  The tax rules allow a withdrawal from a traditional IRA Plan to be tax exempt if invested in a QLAC.  Accordingly, the QLAC premium amount was withdrawn from the IRA before or at age 70 and the QLAC lifetime annuity benefits were determined at the purchase date.  Click here to see a calculator we developed especially for developing this kind of plan.

ROTH PLANS – NEW KIDS ON THE BLOCK

Traditional DC Plans come in a variety flavors and scents – examples include an IRA, a 401(k), a 403(b), a 457(b), a SEP IRA, a Keogh, and a SIMPLE plan.  Each of these plans shares common attributes:

·         Each has its definition of who can contribute and the contribution limits of the plan;

·         The contribution is with pre-tax compensation or earnings;

·         Retirement distributions from the plan are 100% taxable income to the beneficiary.

In 1997, Roth IRAs became a new Defined Contribution Plan option.  Next, in 2001 Congress created Roth 401(k), Roth 457(b) and Roth 403(b) DC Plans. The Roth DC Plans were made permanent in 2006.  Since then, the plan’s popularity has grown.  For example, there were over $500 billion in Roth IRA assets in 2013.

 So, what is different about a Roth versus a traditional DC Plan?  

·         The contributions to the Roth plan are with after-tax compensation or earnings;

·         Retirement distributions from the plan are 100% tax-exempt to the beneficiary.

The income earned inside the Roth DC Plan is also tax exempt – just like a traditional Defined Contribution Plan.  Generally, the implementation rules are the same.  For example, both Roth and traditional 401(k) plans are subject to the same Required Minimum Distribution (“RMD”) rules after the plan beneficiary reaches age 70½.  There are important exceptions.  Here is one: a traditional IRA is subject to the IRS RMD requirements, but a Roth IRA is not.  This is an essential difference that enables us to create a Failsafe Roth strategy.

The 2014 QLAC regulations specifically exclude any distributions from a Roth Defined Contribution Plan.  Of course, any distribution from the Roth Plan is already tax exempt.  As a result, a distribution can be used by the beneficiary to buy any annuity.   The problem is that distributions from that annuity, purchased outside of the Roth, will no longer be fully tax exempt.  Instead, each distribution will include a return of the premium cost (which is not taxed) and the earnings that occurred inside the annuity (which is taxed).

The problem is solved by having a Roth IRA buy an annuity and be its beneficiary.  In other words, the Roth IRA will divide its assets into two buckets.  The first bucket will distribute cash to the beneficiary over a predetermined period – just like a traditional IRA.  The second bucket is used to buy a deferred annuity with a distribution start date (e.g., age 85) just like with a QLAC annuity.   Unlike a traditional IRA that distributes funds out of the plan to purchase a QLAC, The Roth IRA plan is the owner and beneficiary of the annuity.  Annuity benefits are paid to the Roth IRA, which in turn, can distribute the cash receipts to the Roth IRA beneficiary.  So doing, the Roth IRA distributions are fully tax exempt.  By using a Roth DC plan to purchase the annuity, a beneficiary is not constrained by the $125,000 cap ($130,000 starting in 2018) which applies to a QLAC purchase.

An individual may have a Roth 401(k) plan and not a Roth IRA – or have both.  To be sure, 401(k) plans have larger contribution limits.  As a result, an individual’s Roth 401(k) plan can accumulate more savings during his or her working years than a Roth IRA. It is important to recognize that employer 401(k) plans are not uniform.  Today, more than half employer-sponsored 401(k) plans allow an employee to elect either a Roth or a traditional plan.  

Many - if not most - plans require that when an employee resigns, he or she may (or is required to) “rollover” the plan assets into an IRA or another 401(k) plan.  Similarly, when an employee retires, there is a rollover requirement or option.  Also, employer-sponsored plans will be administered by a trustee (also, called a custodian) such as Principal Financial or Fidelity.    The investments available to the plan participant will be those approved by the employer from a list of investments often managed by the trustee’s related fund managers.  A dozen or fewer choices are typical.

When a rollover option or requirement happens, generally it makes sense to move the assets from the Roth 401(k) to a Roth IRA. (Note – rollovers done incorrectly can trigger tax and penalties.  IRS Publications 560, 575 and 590A are helpful reading.  Better yet, consult a tax expert before executing a rollover.)  Even though a transfer to another Roth 401(k) is also a tax-free transfer, remember that a Roth 401(k) plan is subject the RMD required distributions whereas a Roth IRA does not have an RMD requirement.   A non-IRA Roth DC plan could easily fail the RMD test if it holds both buckets – regular investment funds and an annuity.  Assuming there are same investment options, there is no advantage of a rollover to a Roth 401(k) versus a Roth IRA.

Here's another reason for moving to Roth IRA rather than to a Roth 401(k).  Before executing a rollover, the participant must choose a new trustee.  This is an important choice.  For example, Fidelity may offer a short list of annuities that underperform a long list of annuity choices at Principal.  The choice of a plan trustee is a choice of the kind of deferred annuity that is available.  It is important to note that Roth IRA trustees are available that allow “self-directed” investments by the beneficiary.   A self-directed Roth IRA has a truly independent trustee that is agnostic about the purchases selected by the participant. 

 Many of the insurance companies selling annuities will create a Roth IRA to receive the rollover proceeds earmarked to purchase that company’s annuity contract.   Once an annuity is targeted for purchase, it makes sense to ask the carrier if they offer the ability to create a Roth IRA to receive funds designated to buy their annuity.  Creating a new Roth IRA is a service offered for nominal or no cost. 

Please note that a Roth 401(k) rollover can be to more than one Roth IRA.   It is possible to have one Roth IRA to hold the assets to fund the first phase of retirement (i.e., the first bucket) and a second Roth IRA to hold the life annuity to fund the second phase of retirement (i.e., the second bucket).  Such a breakup might be motivated by selecting a plan sponsor with a good investment track record for the first bucket and using a self-directed plan or an insurance company trustee to acquire the second bucket’s deferred annuity.

SUMMARY

A Roth 401(k) (or a Roth IRA) can duplicate the same Failsafe strategy available to a traditional DC Plan that distributes funds to buy a QLAC annuity.  While there are a couple more steps, they are not complicated:

·         Determine the two phases of retirement funding;

·         Divide the Roth DC Plan assets into the two buckets of retirement assets;

·         Migrate  the  two buckets  of assets into one or more Roth IRAs;

·         Purchase a deferred life annuity in one Roth IRA;

·         Distribute bucket one assets during the first phase of retirement;

·         Distribute bucket two assets (annuity receipts) during the second phase of retirement.

Because the Roth IRA buys a life annuity, the participant collects income for however long he or she may live.  Accordingly, it is impossible to outlive one’s savings. 

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 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.





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.


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