Minimum Distribution Planning with QLACs– August 11, 2014

Effective July 2, 2014, newly issued Treasury Regulations define a new type of investment vehicle: the Qualified Longevity Annuity Contract (QLAC). A QLAC is basically a deferred fixed income annuity purchased in an individual’s qualified retirement plan or traditional IRA that pays a fixed amount at some predetermined future age. The key differentiator for QLACs from other retirement plan annuities is that funds invested into a QLAC are excluded from the participant’s account balance for purposes of calculating the required minimum distribution (RMD) from the plan.

The Rules
The new regulations establish several rules that must be met for an annuity to receive QLAC treatment, and while the rules contain many intricacies that must be considered in practice, below are the key takeaways:

  1. No more than the lesser of $125,000 or 25 percent of the account balance may be used to pay premiums on the contract;
  2. Annuity distributions must begin no later than the first day of the next month following the employee turning 85;
  3. Currently, variable contracts and equity-indexed contracts will not meet the definition of a QLAC;
  4. The contract is not permitted to make available any commutation benefit, cash surrender value, or other similar feature; and
  5. The contract, when issued, must state that it is intended to be a QLAC.

The rules apply to defined contribution plans such as a 401(k)s, 403(b)s and 457 plans, as well as traditional IRAs. ROTH IRAs and defined benefit plans are not eligible for QLACs.

The Benefit
So what is the benefit of purchasing a QLAC, other than having an investment vehicle with a fancy sounding acronym? The major benefit is that, assuming the requirements are met, the purchase amount of the QLAC is not factored into the plan owner’s account balance for purposes of applying the RMD rules. If a 72-year-old client purchases a QLAC in a traditional IRA for $125,000 and defers annuity payments to age 85, the $125,000 will not be used in calculating the annual required amount the client must distribute from the IRA. This allows the client to reduce taxable income, provide additional IRA deferral, and establish a fixed income payment in the future that can provide additional longevity protection.

As with any annuity, clients should perform their due diligence and ensure the pricing, terms and the insurer’s financial stability meet their non-tax goals. However, these new regulations provide yet another tool for individuals to consider when planning for retirement.

Contact a member of your service team for further discussion.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.