After rule changes, deferred income annuities known as Qualified Longevity Annuity Contracts (QLACs) offer delayed income payments as late as age 85 for IRAs.
Have previous generations in your family lived well into their 80s and 90s? Do you hit the gym every morning—okay, almost every morning—with hopes of joining them?
Working toward a higher quality of life in your advanced years has gotten more flexible with rule changes for using Individual Retirement Accounts (IRAs), 401(k)s, and other accounts to purchase deferred income annuities and push back the start date for the cash stream you’ll likely need for the long haul. And we mean the long haul.
Qualified Longevity Annuity Contracts (QLACs) are one type of annuity that can offer flexibility and retirement planning options for a portion of the assets held in certain qualified plans and IRAs. They’re a type of deferred income annuity (DIA). By making a premium payment or a series of premium payments to purchase a QLAC, you can lock in a guaranteed cash flow stream starting at some point in the future—typically as early as two years from purchase or up to 40 years later—and the cash flows last for the rest of your life no matter how long you live. In fact, the amount of cash flow in each period increases the longer you delay the start of the cash flow stream.
QLACs are one choice for individuals that are worried about Required Minimum Distributions (RMDs) at over age 70 1/2 (see the sidebar below on RMDs) or in their mid-60s and doing some tax planning for the future.
A Treasury Department rule change is one part of an evolving industry that has seen a bump in demand for annuities. Investors—challenged by pension industry changes, stock market volatility, and Social Security strains—are rethinking how to stretch income potential later in life. Sales of DIAs or longevity insurance alone had grown to about $2.7 billion in 2014 from $211 million in 2011, according to life insurance association LIMRA.
In general, annuities are contracts with insurance companies that can provide a lifetime cash flow stream and help insure against outliving your assets. You put up a certain amount of money, either all at once or over time, and an insurance company agrees to pay you a minimum amount for a set period of time. The amount can be fixed, or can vary, and the term of the annuity can range from a fixed number of years, until long after you die.
Required Minimum Distribution (RMD) is an IRS rule. It states that Traditional, Simplified Employee Pension (SEP), and SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts by April 1 following the year that they reach age 70 1/2.
RMD amounts must then be distributed each subsequent year.
At the core, the Treasury Department recently clarified some of the rules around how QLACs can be purchased and used, particularly in IRAs.
When purchased with pre-tax funds, a deferred income annuity typically would need to begin payouts no later than the date when RMDs are set to begin.
The difference with a QLAC? Income doesn’t have to start until age 85, which is well past the usual age of 70½ for an RMD. Doing so delays tapping assets and potentially generating a taxable event, if desired, plus allows you to receive an income stream guaranteed for the rest of your life.
For example, an individual might use a portion of his assets held in an IRA to purchase a QLAC at age 65, schedule payments to begin at age 85, and plan to use withdrawals, interest, and dividends, from the remainder of his retirement portfolio to provide income for the 20 years between age 65 and 85. If the individual dies prior to age 85, the beneficiary designated by the QLAC owner could receive a death benefit. Keep in mind, holders can use no more than $125,000, or 25%, of the balance in a tax-deferred retirement account to establish the QLAC.
Also keep in mind that these particular income solutions may not fit all investing goals. Diverting funds toward an annuity does take them out of the stock market, potentially forgoing upside opportunity. That’s the tradeoff for an income guarantee. Carefully consider annuities against your broader portfolio and IRA goals, risk tolerance, and other factors.
Investors should carefully consider a variable annuity’s risks, charges, limitations, and expenses, as well as the risks, charges, expenses, and investment objectives of the underlying investment options. This and other important information is provided in the product and underlying fund prospectuses. To obtain copies of the prospectuses, contact an annuity specialist at 800-347-7496 or email email@example.com. Please read them carefully before investing.
The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. Optional riders are available at an additional cost. All guarantees are based on the claims paying ability of the insurer. An annuity is a tax-deferred investment. Holding an annuity in an IRA or other qualified account offers no additional tax benefit. Therefore, an annuity should be used to fund an IRA or qualified plan for annuity features other than tax deferral. Product features and availability vary by state. Restrictions and limitations may apply.
Investment and Insurance Products: Not FDIC Insured * No Bank Guarantee * May Lose Value
Insurance products/services are offered through The Insurance Agency of TD Ameritrade, LLC. Brokerage services provided by TD Ameritrade, Inc., member FINRA/SIPC. The Insurance Agency of TD Ameritrade, LLC and TD Ameritrade, Inc. are both wholly owned subsidiaries of TD Ameritrade Holding Corporation.
The annuity products offered are issued by separate and unaffiliated third-party insurance carriers. TD Ameritrade and these companies are not responsible for each other's policies or services.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.