NEW PRODUCT BULLETIN: QLAC

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Man on Ladder 2A QLAC (\ˈkyü-lak\) or Qualified Longevity Annuity Contract, is a new product and concept just approved by the Treasury Department which allows people who do not need the income from their qualified retirement plan and who do not want to pay the tax on forced income, to defer $125,000 into a QLAC contract. Money in a QLAC escapes the required minimum distribution rules associated with qualified plans and thus, income can be deferred until a later date.

Why Would I Defer Income to a Later Date?

There could be several reasons you do not wish to take the standard required minimum distribution, including:

  1. You already have the income you need and therefore do not need additional income from your retirement account.
  2. Taking additional retirement income from your retirement account could potentially push you into a higher tax bracket.

If you have a diversified portfolio and you and your spouse have, for example, $1million combined in your 401ks and IRAs, you would be allowed to move out $250,000 combined from your portfolio. That means $250,000 escapes the required minimum distribution rules and is allowed to matriculate into the future.

Prior to this new offering, at age 71 this couple would have been required to take $9,434 from their combined $1million account based on the required minimum distribution formula; over 5 years, they would need to take $50,742 and pay $17,759 IN TAXES. In 10 years, they would have distributed $112,188 and paid $39,218 IN TAXES.   By switching this money to a QLAC, they are able to defer that payout, and the longer they defer the payout, the greater that payout becomes.

How Much Does This Annuity Pay When I Need Income?

Payout rates vary slightly from state to state, but let’s say the couple lives in Florida and decides to take payout at age 75. In the state of Florida, the payout rate at age 75 for a woman whose current age is 66 is $1,295 per month, a 12.4% payout rate. If she were to wait until age 80, her rate would be $1,846 per month, a 17.7% rate.

Other Uses of QLAC Income

The beauty of the QLAC is that its use is not restricted so the income from a QLAC can be used in different ways:

  • QLAC income can be used to pay premiums for existing life insurance and long term care insurance, thus alleviating premium burdens from cash flow as we get older.
  • By making a child an income beneficiary for part or all of the income, you can give your child their legacy gift annually while you are still alive.
  • Lastly, a charity can be the income beneficiary of QLAC income, thus becoming a deductible gift to your favorite charity and offsetting the taxes due on the income.Jigsaw

QLACs are the next big thing in retirement planning which will usher in a new wave of legislation and products inside of our 401(k)s and IRAs.  This is a start in alleviating early distribution rules from retirement plans. People are living longer and we need encouragement to create additional income sources to supplement this longevity. QLACs are a start.

 

 


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