With the goal of providing retirees with more options to manage their retirement income, the IRS issued final regulations on "qualified longevity annuity contracts" (QLACs). A QLAC is a type of deferred annuity that commences at an advanced age and continues for the life of the retiree.
A QLAC can be offered under a defined contribution plan such as a 401(k), 403(b), and 457(b) plan, or other employer-sponsored individual account plans, as well as IRAs (except Roth IRAs). This rule allows retirees to spend a portion of their retirement savings on a lifetime income stream, while retaining other assets in readily accessible investments.
Here is an overview of the rules:
- the maximum amount of retirement savings that can be used to purchase a QLAC is the lesser of 25% of the account balance or $125,000, adjusted in increments of $10,000 for cost-of-living increases;
- any amount used to purchase a QLAC will not be included in the amount used to calculate the retiree's minimum required distribution;
- a QLAC can have a return-of-premium feature that guarantees that all premiums are recouped from the annuity carrier if the retiree dies before receiving annuity payments equal to the full amount of premiums paid – the excess is payable to a beneficiary (this type of annuity may be a little more expensive but appeals to individuals who want to provide a benefit to their heirs should they die before the entire premium amount is paid out to them);
- distributions under a QLAC must begin no later than age 85;
- the final regulations stipulate that the QLAC cannot be a variable annuity contract, an indexed contract or a similar contract; and
- the annuity contract must state that it is intended to be a QLAC at the time of issue.
These regulations apply to contracts purchased on or after July 2, 2014.
So who would use a QLAC? Employees concerned that they might
outlive the IRS minimum required distribution (MRD) table should
consider this new option. Let's assume an employee retires with
a large 401(k) balance. MRDs are required when an employee reaches
age 70½. At age 70, the employee purchases a QLAC with
$125,000 of the account balance. The QLAC is to begin payment at
age 85. The employee has removed the $125,000 from the MRD rules
and created a guaranteed income at age 85 of between $32,500 and
$52,500 a year (depending on insurance company assumptions).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.