What In The World is a QLAC????
Despite sounding like a creature from a Star Wars movie, a QLAC is actually a tool that can be very helpful in funding a prolonged retirement. QLAC is an acronym for a Qualified Longevity Annuity Contract. QLAC’s provide guaranteed monthly payments until death and like many other annuity contracts are shielded from the fluctuations of the stock market. Further, a properly designed QLAC can help to manage one’s Required Minimum Distributions from Individual Retirement Arrangements (IRA’s). In doing so, the QLAC may also allow its owner to reduce his/her lifetime income tax bill.
How can one insurance product accomplish so many things? First, the QLAC allows some of the money held in an IRA to be converted into a deferred annuity which can be used to postpone payments until a more advanced age. For the 2021 tax year, IRA owners are permitted to commit up to $135,000 or 25% of the IRA’s value (whichever is less) to the purchase of the QLAC. These funds are not included in the calculation of the Required Minimum Distribution, so the yearly RMD is reduced each year until the QLAC starts paying out its income stream. The money in the QLAC eventually gets distributed and taxed but this can be postponed until the later years of retirement.
Current law requires traditional IRA owners to begin withdrawing RMD’s at age 72. In the event the IRA owner does not need all of the RMD for living expenses, purchasing a QLAC can lower the amount that must be withdrawn resulting in lower current taxation. The maximum age to which QLAC funds may be deferred is age 85, so eventually, the taxes do get paid. However, this strategy can give the IRA owner numerous years to postpone and spread out the tax costs and possibly lower the lifetime tax bill. An additional benefit is that this strategy may also help the IRA owner keep his/her income below the income thresholds where higher Medicare premiums* kick in.
QLAC’s serve as a form of longevity insurance. Since the income stream is guaranteed for life, the product protects a retiree from the costs of living well past normal life expectancy when other resources may have long since been depleted. QLAC’s even permit a spouse or someone else to be a joint annuitant meaning that both named individuals are covered regardless of how long they live (with some conditions).
If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
*Known as IRMAA, the Income Related Monthly Adjusted Amount results in higher Medicare Part B and Part D premiums when certain income thresholds are exceeded.