Have you thought about how living longer might affect your retirement savings? One of the biggest issues facing many Americans is the risk of outliving their money in retirement – we call this longevity risk. With average life expectancies increasing every year, you might live to be 85, 90, or even 100 years old and a longer life may drastically change your financial picture in retirement.[i]
As financial professionals, we stay up to date on how changes in government regulations affect Americans preparing for retirement. A new savings vehicle approved by the federal government in 2014 may help you preserve your income and protect your lifestyle in retirement.
What Are Qualified Longevity Annuity Contracts (QLACs)?
QLACs are a special type of deferred-income annuity that can be purchased within qualified retirement accounts like IRAs and 401(k)s. These types of annuities allow you to exchange money now for a stream of predictable income later in life. What’s new is that the amount deferred into a QLAC isn’t counted in annual Required Minimum Distribution (RMD) calculations, reducing the income you must take out when you reach age 70 ½.[ii]
What Specifics Do I Need To Know About QLACs?
Current IRS regulations allow investors to defer as much as 25% of their total non-Roth IRA account balances (as of 12/31 of the prior year) and/or 25% of each employer-sponsored retirement plan (as of the last valuation date plus/minus any contributions or distributions by the time the premium is paid) up to a total QLAC purchase amount of $125,000 per taxpayer. Though the dollar limit is indexed to inflation in increments of $10,000, it’s not likely that it will be increased any time soon. Currently, you cannot purchase QLACs within a Roth IRA and any QLAC-like annuities held within a Roth will not be considered QLACs.
What Can QLACs Do For You?[iii]
- Defer some of your income. The primary benefit of QLACs is that they allow you to protect against the risk of outliving your savings by postponing income until later in life. An investor could purchase a QLAC at age 60 and possibly delay payments until age 75, 80, or 85 (but no later than 85).
- Lower your taxes in retirement. Because QLACs allow you to circumvent RMDs for the portion within the annuity, they reduce the amount of money you must withdraw from your IRA and may lower your annual taxes until you begin taking payments.
- Guarantee a portion of your retirement principle. QLACs offer a predictable stream of guaranteed income that may last the rest of your life, helping to reduce the risk that volatile markets will cut into your income.[i]
- Protect your spouse’s income. QLACs allow you to add your spouse as a joint annuitant, creating lifetime income for both of you, though individual payments may be smaller.
[i] You should consider the investment objectives, risks, fees and expenses of an annuity carefully before investing. The guarantees offered by the issuing insurance company are backed by the soundness of the insurance company and its claims paying abilities. An annuity is not FDIC insured. Withdrawals from an annuity can affect both the account value and the death benefit. Early withdrawals may be subject to penalties.
What Are The Potential Drawbacks of QLACs? [v]
No take backs. QLACs lack many of the bells and whistles of other types of annuities. They don’t offer cash surrender value or any other communication benefit, meaning that investors are locked into the annuity until payments begin.[vi]
No market growth opportunities. Under current regulations, QLACs must be fixed annuities and cannot offer variable, equity indexed, or similar annuity options. This limitation may reduce the potential return on your investment in the annuity.
Limited death benefits. Because of their simplicity, QLACs don’t have a lot of survivor benefit options. They are generally limited to life annuity or a return of premium lump-sum benefit that may be paid out in the year following the QLAC owner’s death.[vii]
Are You Doing Enough To Protect Your Income In Retirement?
One of the services we offer is a complimentary retirement consultation in which we review your current circumstances and help you find ways to:
- Avoid critical financial mistakes that can derail your retirement.
- Protect your income.
- Lower your taxes in retirement.
Please call our office at (518) 581-1642, or fill out our consultation form to schedule a complimentary evaluation of your retirement preparations.
Maureeen Hallaran, NSSA
& Steve Kamen, NSSA