For many, qualified retirement accounts are the cornerstone of a secure and comfortable retirement. Effective retirement planning can help you retire with confidence.
While employer sponsored plans such as 401(k) or 403(b) plans allow employees to make tax deductible contributions to accounts set up through their company, those not covered by an employer plan can save for the future by making deductible contributions to a traditional IRA.*
Earnings on these contributions have the opportunity to grow tax-deferred over time, thereby helping individuals to more efficiently build wealth for the future.
While qualified employer plans and IRA accounts offer the opportunity for tax advantaged growth, any funds withdrawn from the accounts prior to the owner reaching age 591/2 are included as taxable income, and are also subject to an IRS early withdrawal penalty. Once an individual reaches age 591/2, taxable withdrawals are permitted at any time penalty free. Upon reaching age 701/2, however, IRS rules require that account owners withdraw at least the Required Minimum Distribution (RMD) and pay taxes on the amount that was distributed.**
Given that RMDs are obligatory, some retirees with sufficient income from other sources may find themselves taking taxable distributions that they really don’t need. As well, today’s longer life expectancies may also have some retirees questioning whether they will have adequate income in their later years. Indeed, the costs associated with health care, medications and in-home assistance will undoubtedly continue to rise in the future, so for many, the possibility of not being able to make ends meet, or of outliving their money, are real and valid concerns.
What is a Qualified Longevity Annuity Contract (QLAC)?
A type of deferred annuity contract that allows account owners to delay RMDs until age 85, QLACs were born from changes in IRS and Department of Treasury rules that were implemented in 2014.1 Under these new rules, owners of qualified retirement assets are able to transfer the lesser of $125,000 or 25% of their total qualified account value to a QLAC, thereby reducing the value of retirement assets that would be subject to taxable RMDs at age 701/2.2
For those seeking to minimize taxable RMDs today, while positioning themselves to receive a guaranteed stream of income in their later retirement years, a Qualified Longevity Annuity Contract (QLAC) may be a beneficial component of their overall financial plan.
Benefits of Adding a QLAC to Your Financial Plan
While QLACs may be appealing given their ability to delay taxable distributions beyond age 701/2, they also provide a valuable source of steady and reliable income beginning on a date in the future that’s chosen by the owner. As an annuity, QLACs provide monthly income that will continue over the owner’s lifetime, or if desired, the joint lifetimes of the owner, and his or her spouse.
Given that QLACs provide a pre-determined level of income beginning at a specified point in time, they may be a valuable tool in retirement income planning strategies. For example, a QLAC owner may decide to file for Social Security benefits earlier than full retirement age given that he or she will have income from the QLAC that will supplement the reduced Social Security benefit in his or her later years.
In addition to their lifetime income benefits, riders for inflation adjustments, survivor benefits, or a return of premium death benefit that would refund the value of the premium paid to the owner’s heirs (less any payments that have already been made to the owner) may also be available.
Aspects of QLACs to Consider When Retirement Planning
While QLACs may be a valuable tool for minimizing taxable RMDs, while also providing a source of lifetime income in one’s later years, we believe there are some important considerations to keep in mind.
Perhaps first and foremost is fact that once funds are committed to a QLAC, they’re irrevocable3, and withdrawals are typically not permitted.
Secondly, the monthly income payments are typically fixed once they begin, and during periods of high inflation, the owner may experience a loss in purchasing power. Consider, as well, that if one chooses to delay income payments until age 85, once they begin, it may take several years for the payments to add up to the value of the principal that was originally invested.4
Lastly, we believe it’s important to consider the opportunity cost of investing in a QLAC as opposed to choosing an investment with greater growth potential and taking the RMDs as necessary.
We Can Help Determine if a QLAC Would Work for You
Just as with most investment vehicles, QLACs are not a “one-size-fits-all” solution, but rather one part of a comprehensive financial plan that may benefit certain individuals depending on their goals, tax situation and retirement income needs.
All optional benefits such as riders and bonuses are available for an additional cost. The guarantees associated with optional benefits are backed/subject to the claims-paying ability of the issuing insurance company. It is important to weigh the costs against the benefits when adding such options to an insurance contract.
*The deductibility of traditional IRA contributions are subject to income limits, as well as whether the account owner (or his or her spouse) is a participant in an employer sponsored retirement plan.
Content written by Symmetry Partners, LLC. Our firm utilizes Symmetry Partners, LLC for investment management services. Symmetry Partners, LLC, is an investment adviser registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. All data is from sources believed to be reliable, but cannot be guaranteed or warranted. No current or prospective client should assume that future performance of any specific investment, investment strategy, product or non-related investment content made reference to directly or indirectly in this article will be profitable. As with any investment strategy, there is a possibility of profitability as well as loss. Please note that you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Symmetry Partners or your advisor.
Please be advised that Symmetry Partners, LLC does not provide tax or legal advice and nothing either stated or implied here should be inferred as providing such advice. The information is provided for educational purposes only. Please be advised that Symmetry Partners is merely relaying this information and has no control if some of the timelines are amended.