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The Objective Advisor

Should You Buy a QLAC to Reduce RMDs in your IRA?

November 18, 2014

Should You Buy a QLAC to Reduce RMDs in your IRA?Retirement planning would be easy if you knew how long you were going to live.

For instance, if you knew you were going to live well past 80, you might strongly consider buying a longevity annuity—an annuity that pays no distributions until age 80 or older. Meanwhile, your investment grows and grows.

But there have always been two drawbacks to longevity annuities:

  1. You couldn’t buy them for your retirement plan, because of required minimum distribution (RMD) regulations.
  2. If you died before age 80, your investment became worthless.

The IRS recently passed new regulations eliminating problem #1. But the new rules can’t do anything about problem #2.

The Required Minimum Distribution Problem.

Every traditional (non-Roth) IRA, and most other retirement plans, have required minimum distributions—amounts you must withdraw annually from age 70½ until funds are depleted.

RMDs made it impractical to hold a longevity annuity in your retirement plan. If you withdrew all other funds, the RMD would force you to take early payouts from your annuity—and suffer stiff penalties.

The new IRS regulations eliminate this problem by creating Qualified Longevity Annuity Contracts (QLACs). Now, you can invest up to $125,000 of your retirement plan—or 25% of the account value, whichever is less—in a QLAC, and those funds will be exempt from RMDs, even if the rest of your plan is 100% depleted.

In other words, you can now “hide” a big chunk of your retirement savings in a QLAC, without having to take distributions from—or pay taxes on—those funds until after you turn 80.

Great idea, right?

The Too-Attractive Solution.

Should You Buy a QLAC to Reduce RMDs in your IRA?My opinion? By getting this new regulation passed, the insurance companies have once again made a risky investment a little too attractive.

Buying a QLAC for your retirement plan might make sense for you if:

  1. You have significant cash-producing investments outside your retirement plan, and
  2. You expect to live well past age 80.

Once again, though, no IRS rule change or personal investment acumen can do anything about #2. You can never be certain how long you will live. But you can be certain that, if you die a week before you turn 80, your entire QLAC will be worth zero.

Are you wealthy enough to risk losing $125,000 with no return whatsoever?

If not, don’t even consider a longevity annuity. It’s another one of those investments that only make sense for the extremely wealthy.

There are safer ways to reduce RMDs and the tax burdens they create. I have several ideas, but I’m curious to hear what suggestions other advisors give their clients. What’s your opinion?

Does LifeAuditors Sell Retirement Plans?

No, we don’t.

I wrote this post to inform people—whether they’re clients, or not—about their best options as investors. Unbiased advice is what Life Auditors is all about.

As the founder of LifeAuditors, I have more than 40 years of experience delivering confidential, unclouded financial assessments. We sell no products, have no alliances with financial services firms, and manage no accounts. We can help you be more proactive in your personal finances, because we have no stake.

If you want to know more, visit us at LifeAuditors.com.

 

Image credits: 401kcalculator.org, seniorliving.org

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