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Berko: Answers to questions about QLACs

By Malcolm Berko

Published: January 7, 2017, 6:00am

Dear Readers: Over the past seven months, I’ve received several dozen questions about a relatively new retirement product called a qualified longevity annuity contract. Though I’m not an annuity aficionado, I think this annuity may be an impressive product. Like many folks, if you are concerned about the risk of outliving your money, a QLAC could be an interesting solution. According to Morningstar’s mortality tables, the median life expectancy of a 65-year-old man is 86, and for a woman, it’s 88. For a married couple who are both 65, there’s a 50 percent chance one of them will live to 92. A $100,000 investment in a QLAC at age 65 could, by the time you are 85, pay you $50,000 a year for life. If you’re fearful of living too long, continue reading.

• What is a QLAC? A qualified longevity annuity contract is a deferred income annuity that allows the owner to defer his required minimum distribution, or RMD. QLACs were authorized by the Department of the Treasury in July 2014. Currently, with traditional retirement plans, participants must begin taking distributions at age 70½. However, the Treasury Department, with the approval of Congress, allows retirement plan investors to defer a portion of their RMD until age 85 via the purchase of a QLAC.

• Can I purchase a QLAC at 70½? Any individual retirement account, or IRA, owner can purchase a QLAC, as long as he or she has satisfied his or her RMD requirements. But the maximum issue age is 75.

• What is the maximum amount one can invest? An investment in a QLAC can’t exceed $125,000 or 25 percent of the money in your traditional IRAs, whichever is less.

• Can I buy a QLAC with my Roth IRA? Roth IRA balances can’t be put into a QLAC, and they are not used in the 25 percent calculation above.

• If I have several retirement accounts, how do I calculate the premium? Assume your Roth IRA is worth $200,000, your traditional IRA has a $400,000 balance and your 401(k) is worth $300,000. Follow the numbers: 1) Roth funds are not included when calculating your QLAC investment amount. 2) Your $400,000 IRA allows you to invest 25 percent, or $100,000, in a QLAC. 3) If you transfer $100,000 from your 401(k) to your IRA (tax-free), you can invest $25,000 more in the QLAC, for a $125,000 total.

• Can I buy a QLAC for my 401(k)? Yes, if you manage the 401(k), but if your company manages the plan, you must ask the plan administrator. The maximum contribution is also $125,000.

• Will QLAC amounts increase? Yes. Today’s $125,000 maximum will be indexed for inflation and then adjusted in $10,000 increments.

• At what age must I begin to take distributions? You must begin taking distributions no later than your 85th birthday. You may begin taking payment prior to 70½, though it may not be financially appropriate.

• Is there a minimum or maximum age to buy a QLAC? The minimum age is 18, and the maximum age is 75.

• What if I buy a QLAC and decide I don’t want it? The rules are strict. It’s irrevocable. When you fund a QLAC, it can’t be unfunded.

• What happens if the insured dies before payments begin? The payments can be directed to a spouse or beneficiary.

• What are my tax liabilities? The exact tax responsibility depends on your marginal tax rate, which could be as high as 39.6 percent.

• Can I use the assets in a fixed annuity or a variable annuity that is in my IRA to buy a QLAC? Yes. But the Treasury requires a new contract to be written, and you will have to pay any early withdrawal fees and/or market value adjustments.

• What insurance company should I use? Select the insurer with the highest financial rating and an insurance professional whom you can trust implicitly. Northwestern Mutual, MassMutual and MetLife are excellent insurers.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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