Most taxpayers understand that they are required to take distributions (RMDs) from their IRAs when they reach age 70 ½. For retirees who did not need the RMDs to meet their budgetary needs, they unfortunately found themselves in a position where they were incurring increased tax liabilities because of the RMDs. What if the retiree could delay taking RMDs for 15 years? What if the retiree could begin to take a portion of those RMDs at age 85? Working with an experience tax professional for tax preparation and tax planning services allows individuals to better understand the tax laws and to better manage their tax liabilities.
The IRS recently issued final regulations that provide that taxpayers can purchase qualified longevity annuity contracts (QLAC) in their retirement plans, whether they be 401(k), 403(b), 457(b) or IRA accounts.
What is a QLAC as defined by the IRS? It is a deferred-income annuity (an insurance product) where the owner of the retirement plan pays a lump-sum premium (which cannot exceed the lesser of $125,000 or 25% of retirement account balances) in exchange for a guaranteed lifetime income stream (an annuity) that begins several years later and which must begin by age 85. So someone with a $500,000 account balance today could buy the maximum amount allowed by law. The maximum dollar amount limitation will be adjusted for cost-of-living adjustments in the future.
Just because the IRS issued final regulations allowing QLACs does not mean that employer-sponsored plans will allow them. However, investment advisors who manage IRAs will surely be allowing the use of QLACs and thus individuals need to understand that they now have another investment option.
The IRS will not allow QLACs to be variable annuities, an equity-indexed contract, or a similar contract. While QLACs will undoubtedly receive much publicity, individuals need to work very closely with someone who understands the various types of annuities and how they work. We view QLACs as another tool in your toolbox of retirement investment options that may provide you with more flexibility for your retirement and estate planning considerations. Retirees may now implement a combination strategy that uses a portion of their savings to purchase guaranteed income for life while retaining other savings in more liquid or flexible investments.
If you want to learn more about the different types of annuities and if they are appropriate for you, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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