“Consider qualified longevity annuity contracts (QLACs). Similarly, you may need some new strategies for taking RMDs, which are taxed at ordinary income rates. If you think you might be in the new higher bracket, you could consider a QLAC, which is a deferred income annuity purchased with retirement funds typically held in a traditional IRA or 401(k). A QLAC allows you to defer taking income until the maximum age of 85. While QLAC payments are subject to ordinary income tax, the portion you invest is removed from RMD calculations, and you won’t pay income tax until your payments begin. The maximum lifetime funding amount for a QLAC is $200,000.”
As you approach retirement with an IRA or 401K which will require RMDs at age 73, you can defer those payments by transferring up to $200K from the account to an QLAC annuity. You can select when it will begin paying benefits which are then taxable. This can be used to fund your retirement later on.
We know that annuities are often sold by insurance companies and can be expensive. But companies like Fidelity, Vanguard, and Trowe Price are well known for their low cost annuities.
Has been in the law since 2014 but gets little attention. An opportunity for those planning for retirement. Requirements now have been simplified.
Anyone who will not turn 73 by Dec 31, 2032 (i.e. will not turn 65 by Dec 31, 2024) has an RMD age of 75.
So the QLAC gives you up until age 85 (i.e. an extra 10 or 12 years) to start getting income from up to $200k. But then, at age 85 you will have to start taking RMDs from the QLAC, in addition to your other RMDs. And if you don’t live at least another 10 years or so, you probably wouldn’t even get your initial premium back, much less any growth you gave up for those 10 - 12 years. And the death benefits on QLACs generally only ensure that your beneficiaries will get your original premium back, again without any growth for the 10 - 12 year timeframe.
Sounds like ‘heads you lose, tails the insurance company wins’ to me. At age 73 - 75, the RMD amount on $200k is only about $8k (slightly more at 75, slightly less at 73), so for someone in the 24%/28% bracket, an extra $2k (potentially $2.25k in 2026) in taxes. That seems a fairly small price to pay to preserve an annual increase of $10k a year, even at just a 5% CAGR.
Focusing on avoiding RMDs often provides sub-optimal results.
Roth conversions can be a reasonable choice. You can also take distributions before RMDs start or do QCDs. That said, if you are self-funding any potential long-term care, I would encourage you to have things set up to take money from your pre-tax accounts to pay for LTC, since it will likely be mostly deductible. So leaving money in your pre-tax accounts, even past RMD age, can actually be the best tax move. And RMDs are all about taxes.
For couples, there’s another large disadvantage of delaying (via QLAC in this case) until age 85. At age 85, you are MUCH more likely to have become single than at age 73/75, and that means you have delayed taxation to a point at which you are very likely in a much higher marginal tax bracket. I’ve seen many people lose their spouse and then suddenly be surprised at how much more tax they pay.
Very true == just another example of how people can shoot themselves in the foot by following every method of not paying taxes. We take the RMD money, pay the taxes and stick it back in the index funds.