What You Need to Know About Qualifying Longevity Annuity Contracts
By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
On July 1, 2014 the Treasury Department released the long-awaited final regulations for Qualifying Longevity Annuity Contracts (QLACs). These new annuities will offer you a unique tool to help make sure you don’t outlive your money. The QLAC rules, however, are a complicated mash-up of IRA rules and annuity rules, and you may need help in understanding their key provisions. To help you understand some of the most important aspects of QLACs, below are 3 critical QLAC questions and their answers.
1) Question: What are QLACs?
Answer: QLACs, or qualifying longevity annuity contracts, are a brand new type of fixed longevity annuity that is held in a retirement account that has special tax attributes. Although the value of a QLAC is excluded from your RMD (required minimum distribution) calculation, distributions from QLACs don’t have to begin until you reach age 85, well beyond the age at which RMDs normally begin.
2) Question: Why did the Treasury Department Create QLACs?
Answer: Prior to the establishment of QLACs, there were significant challenges to purchasing longevity annuities with your IRA money. The rules required that unless an annuity held within your IRA had been annuitized, its fair market value needed to be included in your prior year-end balance when calculating your IRA RMD. So, if you had non-annuitized IRA annuities in your IRA, this left you with an inconvenient choice to make after reaching the age at which RMDs begin. At that time, you needed to either:
- Begin taking distributions from your non-annuitized IRA annuities – reducing their potential future benefit, or
- Annuitize your annuities – which would obviously produce a lower income stream than if they were annuitized at a more advanced age, or
- “Make-up” the non-annuitized annuity’s RMD from your other IRA assets – drawing down those assets at an accelerated rate.
None of these options was particularly attractive and now, thanks to QLACs, you will no longer be forced to make such decisions – at least with respect to a portion of your retirement savings.
3) Question: How Much Money Can I Invest in a QLAC?
Answer: The final regulations limit the amount of money you can invest in a QLAC in two separate ways, a percentage limit and an overall limit. First, you may not invest more than 25% of your retirement account funds in a QLAC. For IRAs, the 25% limit is based on the total fair market of all your non-Roth IRAs, including SEP and SIMPLE IRAs, as of December 31 of the year prior to the year the QLAC is purchased. The fair market value of any QLAC held in an IRA will also be included in that total, even though it won’t be for RMD purposes.
The 25% limit is applied in a slightly different manner to 401(k)s and similar plans, so if you’re thinking about using plan money to purchase a QLAC, be sure to check on those specific rules.
In addition to the 25% limit described above, there is also a $125,000 overall limit on total QLAC purchases. When looked at in concert with the 25% limit, the $125,000 overall limit becomes a “lesser of” rule. In other words, you can invest no more than the lesser of 25% of your retirement funds or $125,000 in QLACs.