Unlock the Power of QLACs to Maximize Your Retirement with Deferred RMDs

Planning for retirement involves navigating various financial strategies and market conditions.  On top of that, you also need to evaluate your tax situation and how your overall income can affect Medicare premium costs.  One of the biggest pain points for high-networth retirees is the Required Minimum Distribution (RMD). If you have saved well for retirement, then you know that the requirement to take a set distribution may push you to a higher tax bracket, and the percentage of the distribution only goes up as we get older.  Is there a way to delay your pre-tax retirement account from distribution until a later age?  Enter Qualified Longevity Annuity Contracts (QLACs).

What Is a QLAC and How Can It Benefit Your Retirement Plan?

These specialized annuities allow you to defer withdrawing a portion of your retirement savings until later. The longest you can delay it is age 85. Deferring withdrawals translates to deferring taxes on that portion of your savings, reducing your current tax and RMD requirements. QLACs also provide a guaranteed income stream, regardless of market fluctuations. This reliable income source could alleviate income or healthcare cost concerns, bringing peace of mind to your golden years.  Here’s an example of how a QLAC can reduce your RMD. 

Understanding the Contribution Limits and Tax Implications of a QLAC

Secured 2.0 updated the limit you can defer up to from $145,000 to $200,000. Once the $200,000 has been placed in a QLAC, it will no longer have RMD requirements.  When you start withdrawals on the QLAC, the distribution will be taxable since it is still a pre-tax account distribution. 

The Advantages and Disadvantages of the Qualified Longevity Annuity Contract

While the biggest advantage of the QLAC is to defer RMD, there are other advantages.  The income will be paid in a guaranteed offered by an insurance company.  That means you could obtain additional guaranteed lifetime income, minimizing concerns around longevity and outliving your assets.  Also, these products do not have any associated costs or fees since the income payments are calculated by the insurance company.  Lastly, since the insurance company guarantees the returns and payments, you do not bear any market risk and worry that you may lose money.  

Like all strategies, there are drawbacks as well. If you decide to purchase a QLAC, the decision is irrevocable.  That means you cannot change your time and cancel the contract.  Moreover, you are bound by the lifetime income choice you made.  You will no longer be able to withdraw larger amounts, even in the event of an emergency.  Lastly, you will miss out on the growth potential of the market. The insurance does not offer any return beyond the agreed-upon income stream.  That means the only way to get more than you put in is to live as long as possible.