By Kathy Cantor, CPA
Americans are living longer in retirement and they will need an income stream during that time. More retirees now rely on defined contributions plans, so the issue of how to guarantee an income stream from these plans needed to be addressed.
The Department of Treasury has recognized that Qualified Longevity Annuity Contracts (QLACs) are a cost-effective solution to the concern that people would outlive their assets. This concern often led people to unnecessarily limit their spending in retirement. Now, rather than devoting a large portion of their portfolio to annuities that begin distributing income at 70 1/2, retirees can use a combination annuity strategy including QLACs whose distributions start at an advanced age.
What is a QLAC? It's a type of deferred annuity held in a defined contribution plan which begins distributing income at age 85, and continues distributions throughout the annuitant's life. The QLAC can provide retirees with a regular stream of income for as long as they live and can mitigate their concern over outliving their assets.
The purpose of the required minimum distribution (“RMD”) rules is to prevent an individual from deferring income until death without taxation. Under the prior law, an annuitant had to start taking distributions on each contract at age 70 1/2. The final regulations issued by Treasury amend the RMD rules so annuitants can delay initial distributions on a QLAC until age 85, thus avoiding potential depletion of a retirement account.
The final regulations will apply to QLACs purchased on or after July 2, 2014 which are held in qualified defined contribution plans. They will also apply to existing annuity contracts which are converted to QLACs. The premiums paid cannot exceed the lesser of $125,000 or 25% of the applicable retirement account assets with cost-of-living increases in $10,000 increments. The annuitant has the ability to correct an excess purchase without causing a disqualification.
A QLAC can also provide a return of premium feature if an annuitant dies before receiving benefits equal to the premium paid. This is an important component of the final regulations; the proposed regulations only allowed for an income stream which was paid out over the life of the annuitant's beneficiary.
If you are interested in exploring the possibility of including a QLAC in your retirement planning, please contact our office.