6 Jul 2018
While our Girls Night Out Book Club usually focuses on the selection at hand during our monthly gatherings, it’s not entirely unusual to find the discussion veering off course. At our last get-together, the cost of financing an extra long life took center stage in our conversation. Isabel was eager to inform the group they can choose not to take all of their Required Minimum Distributions (RMDs) from their retirement plans when they are 70½ years old.
A 2014 regulation from the U.S. Treasury Department allows individuals to defer the distribution of part of their qualified assets beyond age 70½ through the purchase of a Qualifying Longevity Annuity Contract or QLAC (pronounced cue-lack).
A QLAC is purchased with funds from your existing IRA or 401K account(s) and set up as an insurance company annuity: designed to pay you a stream of monthly income later in your retirement. QLAC payments begin at age 85 or earlier, as designated by the annuitant.
With traditional IRAs and qualified plans, individuals typically must begin taking RMDs no later than April 1st of the calendar year after they turn 70½. A QLAC is one of the only qualified investment options that offers the opportunity to defer a portion of RMDs and the taxes associated with those distributions.
Sylvia wanted to know how much she could defer. Isabel explained she could reallocate 25% of her qualified IRA account, up to a maximum of $130,000. The money she would have paid in taxes is earning interest in the annuity along with the money she deferred. The insurance company can tell Sylvia exactly how much income she will receive in the future given her investment. Plus, the annuity is not subject to stock market or interest rate risk. And with this guaranteed income stream for her later retirement years, Sylvia believes she would be less concerned about running out of money.
Angela had been quiet during the discussion. She had already begun to take withdrawals from her IRA soon after she retired at age 68. After listening to Isabel and Sylvia, she realized that if her late husband, Sam, had a QLAC when he retired, she would have a substantial account to help as a backup for her later retirement years. A QLAC can be set up beginning at age 62. And it’s still not too late for Sylvia – she can invest in one until the age of 82.
The deferred money is used to purchase guaranteed future income. If the annuitant passes away during the deferral period, the total premium that was paid goes to the named beneficiaries