The recent passage of regulations from the U.S. Treasury Department allowed the creation of a qualified longevity annuity contract. When the financial industry first learned about these new rules, we knew this was going to create great planning opportunities for our clients. QLACs are available for IRA money up to $125,000 of a client’s IRA holdings, provided it doesn’t exceed 25% of their combined traditional IRA balance. A QLAC allows for a deferment of required minimum distributions (RMDs) until age 85, and thus defers paying taxes on this income as well. It’s important to note that ROTH IRA balances cannot be included in the calculation, nor can they be put into a QLAC.

Many of our clients opt to take social security at age 70 to receive the highest payment. When they arrive at this point, they also find themselves receiving a sizable RMD from their IRA account in the year they turn age 70.5. The amount of the distribution almost always surprises clients and we often have people comment, “I don’t need this money, why are they making me take it?”

Also see: "Why are regulators targeting 401(k) rollovers?"

With a QLAC strategy, we are able to take at least some of those dollars off their balance sheet for purposes of calculating the RMD and the corresponding taxes that come with it. We find our clients like having a guaranteed income, and they also like having buckets of income that start at different times and are taxed in different ways.

Many of our clients make their 401(k) contributions to the Roth component, so at least their $18,000 or $24,000, depending on their age, goes into an environment that (providing certain IRS criteria is met) gives them tax-free access to dollars at distribution. We find clients still have significant amounts of money in pre-tax IRAs. Being able to delay RMDs on some of it meaningfully enhances their financial situation.

The power of guaranteed income

Intuitively, clients understand the power of having guaranteed income, and the dramatic difference it can make to their portfolio to not have to liquidate an investment during a downturn. Having guaranteed income to match their fixed expenses provides them great comfort at retirement. It also helps them handle the psychological issues that go with not having an income coming in from working.

Once clients incorporate the QLAC into their financial plan, we find they like the idea of guaranteed income to the point where they want to add other sources to create it, and have layers of income come in at different times. One layer begins in the year client’s attain age 70.5 with the RMD, another may start at age 75, and we may have a third layer start at 80 or 85. We are able to accomplish this best when both spouses have IRA accounts and can utilize the QLAC strategy, and take out money at different ages. Some very interesting planning opportunities have emerged, and as advisers, we need to do our due diligence and educate our clients about the best strategy that fits their retirement needs.

Richardson serves as a wealth management advisor on the Rosenblatt Richardson team at the San Francisco office of Northwestern Mutual. He is a member of the Northwestern Mutual Forum, a group of the firm’s most elite and respected advisers nationally. He is also a member of the Million Dollar Round Table, placing him in the top 1% of the world’s financial advisers. He ranks in the Top 100 advisers in Northwestern Mutual around the country for comprehensive financial planning.

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