QLACs (Qualified Longevity Annuity Contracts) may help you defer RMD taxable income. QLACs have been around since 2014, but there’s been no rush by investors to jump on the bandwagon – and for good reason: they’re hard to understand and investors are limited to the lesser of 25% of aggregated IRA balances or $145,000. They’re also a fixed return, thus traditionally offering little chance for growth.
There are two reasons QLACs are getting a second look: (1) SECURE Act 2.0, and (2) rising interest rates. According to Kiplinger’s, QLACs re offering 100% to 250% more income than they did just three years ago.
How it works
A QLAC is technically a deferred income annuity purchased by your traditional retirement account. The tax-free transfer not only purchases a QLAC but it also reduces your retirement income balances, which ultimately reduces your taxable RMDs!
Now, because of SECURE Act 2.0, individuals can contribute up to $200,000 into a QLAC during life (there is no percentage limit regarding the IRA balance). This could be huge for married couples if both partners take advantage of increased contribution limit. In addition, because of SECURE Act 2.0, you can also include a “return of premium” feature in your QLAC so that the purchase amount, less any payouts, goes to a beneficiary at your passing.
QLACs are fixed annuities, so their return is reliant on interest rates. Current higher rates have made these attractive. QLAC withdrawals are required to begin at age 85, so this strategy provides a way to (1) reduce taxes on early RMDs while (2) providing a ‘late life’ income solution that’s guaranteed, (3) provide a nice add-on to Social Security or provide for long-term care, and (4) protecting your heirs.
The QLAC strategy is just one for late life income (there are others that provide other tax advantages), but this one allows you to reposition IRA money without current taxes and reduce your RMDs when they come due. One drawback: income from the QLAC will be taxable and no one knows what taxes will be at that time.
There’s one hint that makes one suspect it may be a good idea: the government limits how much your able to convert. Usually if the government limits something, it makes me suspect it’s a good thing.
SECURE Act 2.0 also raises other issues. Here’s a checklist you might find helpful.
Jim
