Uncle Sam has delivered investors an early Christmas present: A way to defer taxes on retirement savings for as much as 15 years longer than previously allowed.
Here are the details. As you probably know, retirement accounts such as IRAs and 401(k)’s provide tax deferral until you turn age 70 ½. That is when you must start taking minimum required distributions (RMD), which are taxed at your ordinary tax rate.
Recently, however, the IRS approved a method by which taxpayers may be able to decrease that RMD significantly. The new regulation permits a specific type of annuity—called a qualified longevity annuity contract (QLAC)—to be excluded from your RMD calculation.
The QLAC may be bought through an IRA, 401(k) or other employer-sponsored, tax-deferred savings vehicle. Those who own a QLAC inside their qualified retirement vehicle may exclude its value from their RMD calculation up to age 85. The exclusion total is typically limited to $125,000 or 25% of one’s retirement account balances, whichever is less.
The change is important not just because it allows you to defer more of your savings for longer, but also because it allows more money to grow in your account instead of being diverted to the IRS coffers. This can lead to significantly more retirement security.
Now, what exactly is a qualified longevity annuity contract? QLACS are what’s known as longevity annuities, owned inside the types of qualified retirement plans described above. Longevity annuities are designed to keep you from running out of money in retirement.
Longevity annuities are different from immediate annuities in that their income stream doesn’t start right away: It begins at a specified future date. For example, one could buy a QLAC designed to begin payments at age 80, while someone else could design a QLAC to begin payments at age 85.
A series of conditions must be met for a longevity annuity to qualify as a QLAC. The annuity can contain no more than 25% of your total IRA account balances. Also, its total balance can’t exceed 25% of the balance in any single non-IRA account you own.
As long as you are careful to meet the conditions, the strategy is an exciting way to develop more of a financial edge in retirement. Please don’t hesitate to contact us if you’d like to discuss using a QLAC to shield more of your retirement savings from taxes.
