Academic journal article Journal of Accountancy

QLACs Protect against Outliving Retirement Savings

Academic journal article Journal of Accountancy

QLACs Protect against Outliving Retirement Savings

Article excerpt

With longer retirements due to increasing life expectancies, today's retirees have to worry about outliving their retirement savings. Recently issued regulations (T.D. 9673) allow a new type of annuity contract, the qualified longevity annuity contract (QL4C), to be used in certain retirement plans and IRAs, effective for annuity contracts purchased after July 1, 2014. A QLAC is a form of deferred annuity that can begin making payments as late as the year the taxpayer is 83 years old. And contributions to pay QLAC premiums are excluded from the remaining account balance when calculating required minimum distributions (RMDs) from the retiree's defined contribution plan or IRA.

Under the RMD rules, once the participant reaches his or her required beginning date, which generally is April 1 of the calendar year following the later of the year the participant reaches age 70lh or the year the participant retires, the plan or IRA must distribute each year a minimum amount that equals the prior year's adjusted account balance divided by the distribution period. The distribution period is determined each year by looking up the retiree's age in the IRS actuarial tables. If the participant's entire interest in the plan or IRA is not distributed by the required beginning date, the participant's entire interest must be distributed over the life of the participant or over the lives of the participant and a designated beneficiary.

One hedge against outliving retirement savings has been for the retiree to have his or her retirement plan or IRA purchase a deferred annuity. The deferred annuity payments would start when the retiree reached a specified age. However, under the prior rules, the retiree had to include the actuarial value of the deferred annuity in his or her account balance, inflating the account balance and resulting in larger RMDs. …

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