By Dan Schulte, Vice President and Manager, Annuities and Insurance

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Tax-deferred investments interest and investment earnings accumulate tax-free, until an investor takes constructive receipt of the profits.  Qualified retirement plans such as traditional Individual Retirement Accounts (IRAs) are tax-deferred, but investors should be aware they are not allowed to defer taxes forever.  Eventually, Uncle Sam is going to want his share and will require taxable distributions to come out of these accounts. Required minimum distributions (RMDs) from these retirement accounts must begin April 1 following the year they reach age 70 ½.

For investors approaching this age, often receiving the full amount of this annual distribution can provide some angst.  In some cases, individuals are being required to take taxable income distributions that are not needed for current living expenses.  In many cases, individuals would prefer to take less income now to help ensure they do not run out of money later in life.  This is especially a concern if the individual is in good health and/or there is a significant longevity history in their family.

If you are an investor in this situation, you might want to consider a Qualified Longevity Annuity Contract (QLAC), for a part of your retirement plan assets.  A QLAC will allow a person to defer a portion of their qualified retirement plan assets past the RMD age limitation of 70½.  This results in lower RMD income, which will reduce the current tax bill, since taxes are not paid on withdrawals from a QLAC until received in the future.  These annuities, which are purchased through an insurance company, will guarantee* an attractive future lifetime income stream on the income start date of the policy.  The income start date must begin by the policyowners 85th birthday, and is established on the issue date of the annuity contract.   The longer the income start date is deferred, the higher the future income stream that is paid to the policyowner.  In addition to not having to take RMDs on the assets, a QLAC can provide investors comfort knowing they will never outlive their portfolio.  The savings that are allocated to a QLAC aren’t in the market, so they won’t be affected by swings in the stock or bond markets. Knowing that a steady paycheck will be received later in retirement might allow a retiree to take more risk with other investments and/or feel free to take larger systematic withdrawals from the rest of the portfolio earlier retirement.

Potential investors should realize that the IRS places some significant limitations on QLACs:

  • The purchase is irrevocable once you put money into a QLAC, you can’t change your mind and have access to the funds
  • Income payout dates are selected at issue and must begin by the policy owners age 85.
  • The maximum deposit is the lesser of $130,000, or 25% of IRA or qualified plan assets.
  • The contracts have no cash value; however, contracts offer an optional return-of-premium death benefit if death occurs before the income start date.

To learn more about how QLACs can help alleviate longevity risk, and to obtain quotes, contact your Benjamin F. Edwards financial advisor.

Benjamin F. Edwards & Co. does not provide tax advice, therefore it is also important to consult with your tax professional for additional guidance tailored to your specific situation.

*Guarantees are subject to contract terms, exclusions, and limitations, and the claims-paying ability of the issuing company. This contract type is irrevocable, and has no cash surrender value, and no withdrawals are permitted prior to the income start date. Income payments are paid as long as the annuitant is living, provided the annuitant is alive on the designated income start date. Contracts in which a Life Only payout option is selected do not provide a death benefit, either prior to or after the designated income start date.