Worried About Outliving Your Savings? Try a QLAC
A long, healthy retirement can be a wonderful thing, especially when it means you’ll have more time to spend with loved ones and enjoy the things you want to do. But along with living longer comes a challenge. As you age, research shows health-care-related costs are likely to consume more and more of your retirement income.
How do you help ensure you have enough income later in retirement to cover these and other essential expenses that tend to increase as you age?
Thanks to a recent change in regulations by the Treasury Department, you can now take a portion of the money you’ve saved for retirement through an Individual Retirement Account (IRA) or eligible employer-sponsored retirement plan and use it to purchase a Qualified Longevity Annuity Contract (QLAC).
What Is a QLAC?
A QLAC is a special type of deferred income annuity that pays a monthly income starting at a date later in life that you choose (up to age 85) that’s payable for the rest of your life, no matter how long you live. Generally, the longer you wait to start taking the income, the higher your monthly income payment will be.
Longevity annuities aren’t new, but in July 2014 the IRS shifted how it treats a longevity annuity within a tax-deferred retirement account, such as an IRA. The new rules allow you to direct up to $125,000 of your IRA money—or 25 percent of your total IRA account values, whichever is less—to a QLAC and defer having to take any required minimum distributions (RMDs) on that money until you reach age 85. Excluding the value of your QLAC from your RMD calculations in the early years of retirement enables you to keep a greater portion of your retirement savings intact longer.
Why Defer Income to a Later Date?
While the purpose behind the QLAC is relatively simple—providing guaranteed income later in a retiree’s life—in reality, it also adds a new level of flexibility to your retirement planning.
For starters, a QLAC is one of the few qualified investment options that allows you to defer taking retirement income beyond age 70½. This enables you to preserve your retirement savings to meet future health care and other expenses—a significant advantage, especially if you have other sources of income and don’t need more RMDs from your retirement savings.
And because the value of your QLAC is excluded from your RMD calculation, it also may lower your current taxes. For example, if you have a $500,000 Traditional IRA, you could fund a $125,000 QLAC under the current rules. This means your RMDs would be calculated on $375,000 ($500,000-$125,000).
QLACs provide an attractive way to enhance your financial security for later in retirement. However, whether one is right for you will depend on your specific circumstances. For this reason, check with your financial representative to see if a QLAC makes sense for your retirement needs and goals.
To see an example on how a QLAC could work for you, download Northwestern Mutual’s QLAC brochure.