Q. There was an article in Barron’s that discussed a deferred-income annuity and said: “These annuities are sometimes available in a qualified plan like a 401(k), or can be purchased in an IRA, which offers additional tax benefits. Investors can put up to $130,000 into a deferred-income annuity within an IRA or 401(k) that won’t be subject to the required withdrawals that the IRS mandates when you turn 70 1/2.” Is this an accurate statement?
— Still working
A. The statement in the article is correct.
These investments are known as qualified longevity annuity contracts (QLACs) and can be purchased in retirement plans, including 403(b) plans, said Dawn Brown, a certified financial planner with Lassus Wherley in New Providence.
But, she said, company plans are not required to offer the option to purchase a QLAC.
A QLAC allows a plan participant the option to purchase longevity insurance inside their retirement plan, she said.
“The amount invested in a QLAC is the maximum of $130,000 or 25 percent of the value of the account,” Brown said. “Therefore if your retirement account is valued at $520,000 or higher, the maximum you can put into a QLAC is $130,000.”
Brown said when you purchase the annuity, you will choose the age you wish to begin the income payments for the annuity. The latest age you can start is 85. This, along with your life expectancy, will determine the monthly annuity received in the future, she said.
“Though the annuity is in a retirement account, the premium amount is exempt from Required Minimum Distributions starting at age 70 1/2,” Brown said. “For example, if the value of your retirement account is $520,000 and you purchase a QLAC for $130,000 your Required Minimum Distribution will be calculated on $390,000.”
Before you move on this, there are some factors to consider.
First, the funds used to purchase the QLAC are no longer liquid and available for withdrawal, Brown said. The balance of the IRA is available but not the amount committed to the annuity.
Also, she said, the QLAC is not exposed to the fluctuations of the stock or bond market for the upside or downside.
And, the annuity amount to be received is predetermined at the outset of the contract.
Plus, she said, your beneficiary options should be understood.
“Payment to beneficiaries are usually either the return of principle or an annuity for the beneficiary,” Brown said. “A return of principle payout is distributed as a lump sum and will be taxable as income in the year paid.”
Then there’s the joint annuity, which will pay out the benefits over your and your beneficiary’s lifetime. This offers less flexibility than a regular IRA, Brown said.
You should also understand any fees you are paying in purchasing the contract.
“Though a QLAC offers a guarantee of funds for your life expectancy, those funds may not be sufficient for your overall needs and you should understand how the purchase of this contract helps you to fulfill your overall financial goals,” she said.
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