21 Apr I have to take an RMD. Will this strategy help me save on taxes?

Q. I am a few years away from needing to take my first Required Minimum Distribution (RMD) from my 401(k). I am considering transferring some money to a QLAC in order to defer paying taxes and to keep my income below the threshold for a Medicare Part B increase. Can you tell me the pros and cons of transferring money to a QLAC?
— Strategizing

A. There’s a lot to consider with this kind of a move.

Let’s start at the beginning.

QLAC is short for a “Qualified Longevity Annuity Contract.”

This is a deferred annuity that’s funded by a qualified retirement account such as a 401(k), 403(b) or IRA, said Matt Rembish, a certified financial planner with JFL Total Wealth Management in Boonton.

He said the maximum you can contribute to a QLAC is $200,000, and you can defer taking withdrawals on this money until age 85.

The advantages?

For starters, Rembish said, it lowers your RMD today, which can help you manage your tax bracket better.

“Once you begin taking distributions from the QLAC, the insurance company promises to continue paying you a certain dollar amount per year for the rest of your life,” he said. “This can continue to your spouse if you pass away first.”

The money is protected from market downturns because you are limited to using a fixed annuity to meet the QLAC retirements, he said.

But there are downsides, too.

Your opportunity for growth is limited on these products since you cannot use a variable or indexed annuity, he said.

These types of products could potentially have high fees, he said, and you need to remember that guarantees are backed by the claims-paying ability of the issuing company.

“The deferral on this really isn’t that much,” he said. “Let’s say you contribute the full $200,000 to a QLAC. If you’re age 72, an RMD on that money would be about $7,000. Is it worth losing control and the opportunity for growth for that amount of deferral?”

He said instead, you may want to consider other strategies if you want to lower your RMD.

He said if you are charitably minded, you can utilize a Qualified Charitable Distribution. You can send funds from your IRA directly to a qualified charity. This counts towards satisfying your RMD for the year and is excluded from taxable income, he said.

Roth conversions could be another tool for tax bracket management.

“You will owe income tax on the amount you convert today, but it has potential for growth and can be taken out tax free once the account has satisfied the five-year aging requirement and the owner has reached age 59 ½,” he said. “Roth IRAs do not have an RMD.”

He noted you mentioned taking your RMD from your 401(k) rather than your IRA.

“Check what your fees are on your 401(k),” he said. “it may be cheaper to move this to your own IRA. Moving it to an IRA can give you a wider range of funds to select from.”

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This story was originally published on April 21, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.