In late 2022, the federal government passed legislation known as the SECURE 2.0 Act. Provisions in this bill have made it easier for people to fund certain annuities that can delay taxes on their retirement funds until the age of 85.
First, What Is an Annuity?
If you are thinking ahead to retirement, you may consider buying an annuity as part of your financial planning strategy. An annuity is a product you purchase from an insurance company that, in return, guarantees you will receive regularly scheduled payouts beginning on a certain date and continuing until your death.
Annuities can serve as a popular source of income for retirees and come in a number of varieties. For example, an immediate annuity may provide you with payments right away, whereas a deferred annuity can be set up to start your payments years into the future, when you anticipate needing that income most.
As a result of SECURE 2.0, one type of deferred annuity – called a qualified longevity annuity contract, or QLAC – has undergone some changes that many are finding particularly valuable.
Read on to learn more about how this option may be helpful.
What Is a Qualified Longevity Annuity Contract (QLAC)?
Similar to other types of annuities, a QLAC is an annuity that you purchase with funds from an IRA, 401(k), or 403(b) account and that guarantees you will receive retirement income on a set schedule. The advantages of QLACs include the following:
- You do not pay taxes on the funds in a QLAC until your payouts begin.
- You can include your spouse or another party in a QLAC, and they can receive annuity funds after your death.
- Funds in a QLAC do not count toward the calculation of required minimum distributions (RMDs).
An RMD is the minimum amount of money you are required to take out of certain retirement accounts each year. (Thanks to SECURE 2.0, these withdrawals – which used to begin at age 72 – are not required until you reach age 73. Better still, as of 2033, you’ll be able to wait until age 75.)
SECURE 2.0 changed the funding rules for QLACs as well, which has made them even more attractive to some consumers.
Previously, the maximum dollar amount you could take from an IRA or other qualifying retirement account and put in a QLAC was $125,000 (or 25 percent of the account balance, whichever was less). As of 2023, the 25 percent provision has been removed altogether. The maximum premium also increased to $200,000 (which will be adjusted for inflation in the future).
Who Would Find QLACs Most Helpful?
Retirees, or those nearing retirement, who want to ensure that they will have guaranteed monthly income for life may be strong candidates for a QLAC.
“Longevity” is the key word in the name of this product, as you can defer payments until age 85, along with the taxes on those payments.
In addition to not counting toward the calculation of RMDs, these funds also do not count toward Medicaid eligibility. So, a QLAC would be a useful tool for those who would like to protect their retirement funds from taxes and long-term health care expenses.
An investor could purchase a series of QLACs and “ladder” them so they start paying off in different years. This can help with tax planning, as the income from these annuities is taxed at normal rates.
Annuities are not the only option when it comes to retirement planning. Talk to an estate planning attorney for more information on whether a QLAC fits into your financial plans. Find one in your area.