Retirement Needs Vs. RMD Rules And The QLAC

Are you entering retirement, but want to delay taking the full required minimum distributions (RMDs) from your retirement portfolio? Perhaps use the money to help secure the possibility of a long retirement instead? Say hello to the QLAC.

QLAC stands for Qualified Longevity Annuity Contract. It’s a type of annuity that can be bought with money from qualified retirement accounts. And it provides a way to delay required minimum distributions and their associated taxes from the portion of the money used to buy this type of annuity. Yet at the same time, it helps build a plan for the possibility of living a very long life.

To fully appreciate the possible benefits of a QLAC, you first need to understand the rules for withdrawing retirement funds.

Required minimum distributions (RMDs) defined

When someone reaches age 72, they are required to start withdrawing money from their tax-deferred retirement accounts every year. And they must take the money whether they need it or not.

These withdrawal requirements cover all employer-sponsored retirement plans. These accounts are funded with pretax dollars and grow on a tax-deferred basis. But withdrawals are taxed. That’s why the government sets an age when withdrawals must be made – it must collect taxes at some point to generate funds for the federal budget.

RMDs can present a challenge in planning for longevity and associated expenses, particularly increased healthcare costs. Essentially, retirees must balance RMD requirements against their expected retirement income needs. Deferring a portion of qualified retirement funds adds some flexibility toward achieving the balance. A QLAC is a good way for someone to defer a portion of their required minimum distributions from the retirement assets to a later date.

Annuities and the QLAC

Annuities are a useful way to help plan for a long retirement and the risk of outliving your funds. With an annuity contract, in exchange for a payment or series of payments over time, an insurance company will provide a guaranteed stream of income at some specific point in the future.

Essentially, a QLAC is a specific form of a deferred annuity that can be purchased with retirement funds. Those retirement funds are removed from RMD requirements, and their associated taxes are deferred. There are limits, though. The QLAC deferral can only last up to age 85. By that time, you must start receiving payment streams from the QLAC. Deferring a portion of qualified retirement funds from RMDs allows more flexibility in planning for things like long-term care needs.

It is important to note that not all annuities qualify as QLACs. And QLAC annuities must meet certain IRS criteria. A deferred income annuity must be designated at the time the contract was purchased; you cannot convert an existing deferred income annuity into a QLAC after a contract was issued.

The primary reason to choose a QLAC is to secure a guaranteed income stream for later years, especially if longevity is a concern. For the right person, a QLAC can provide a guaranteed income solution at a later age that may help them manage the tax liability associated with RMDs.