Today we're talking about the tax advantages of a QLAC, a qualified longevity annuity contract. If you don't know about them, you need to know about them. Because I think, in a perfect world, QLACs would be the number one selling product in the country when it comes to annuities. That's the way it should be. And you're saying, "Really? Then why haven't I heard about it?" Well, you're getting ready to learn.
So let's talk about QLACs, where they came from, how our friends first introduced them at the treasury department and the IRS. In 2014, they introduced the product to encourage people to add another component of the income floor to their lives. And the income floor is that income stream that comes in every single month. If you have a pension, by the way, pensions are an annuity, which is fantastic. The problem with that is, less than 10% of private companies offer pensions. If you work for the government or some good union, they have a pension, but most people don’t have access to one even though just having social security was never meant to be the primary retirement income source.
I mean, if you hate all annuities, then you hate your social security. Because, by the way, social security is the best inflation annuity on the planet. Yes, it's an annuity. Why? Because it provides a lifetime income stream. So, the treasury department and the IRS are both our friends. They say, "Hey, with your traditional IRA, you can buy a QLAC with that money." And some employer-sponsored plans are offering them now, but most people buying them have traditional IRAs, not Roth IRAs. You can put money into a QLAC to provide a lifetime income stream in the future. And in addition, you can add your spouse or partner as a joint lifetime income recipient as well.
You can structure a QLAC so that 100% of any unused money goes to the beneficiaries. In addition, the amount of money in a QLAC is not used to calculate your distribution requirement. So you can save some taxes. Does that sound too good to be true? No. Because it's not. It's a contract. The downsides and the limitations of QLAC are that there are no market attachments and no market growth. To me, boring is good. Why? Because you own an annuity for what it will do, not what it might do.
For example, if you have an IRA and your spouse has an IRA, the rules apply to both, which is that you can use the lesser of 25% of your overall IRA qualified assets or $135,000. So let's just land on the $135,000.
If you put money into a QLAC and have a $1 million IRA, you can put $135,000 into a QLAC. And if your wife has a $1 million IRA, congratulations to both of you; you’re both millionaires, but she can put, or he can put $135,000 in that QLAC as well.
The cool part about it is you can set it up either single life, joint life, or communal life with your spouse or partner. Disclaimer, I'm not a tax lawyer. I'm not a CPA. If you're talking taxes, you need to go to those people. And we work directly with CPAs and tax lawyers to ensure that everything’s working together with your overall plan and QLACs being part of that overall plan. Again, you have to understand that QLACs were put on the planet for a lifetime income. They're not put on the planet from market growth. They're not put on the planet for liquidity or long-term care. These are pension products with your IRA.
Now, the rules are that you can start as soon as age 72 and push it out as far as age 85. You don't have to go as far out as age 85. You could say, "Okay, out of the 135,000, let's buy three contracts and have income start at 75, 80, and 85." Why? Because that's the only way to address inflation using an annuity. You can also put a cost of living adjustment increase with some annuities or with a QLAC.
So when you go take your requirement of distributions from your IRA when you turn 72, that QLAC, that #135,000, is not part of your calculation. So, if you have nonannuity assets in your IRA, you'll have to take the requirement of distributions from those, but you do not have to include the $135,000 as part of that calculation. Remember the rules. It's the lesser of 25% of your total IRA assets or $135,000 at the time of this blog. It keeps rising every year or so. The IRS and the department of treasury raise that limit on what you can put in. So, there are some tax advantages. There's a potential that your RMD taxes will be less because you do not include that $135,000.
The other thing you have to look at from a tax savings standpoint is when you start the income from a QLAC, they're going to base that income stream primarily on your life expectancy or life expectancies if joint with a spouse or partner at the time you make the payment. Interest rates play a secondary role. So you're going to get that income stream coming from that 135,000, and you'll have to pay taxes just on the income stream you get.
So, let's just say, $135,000 is what you put into the QLAC, and your income stream from that coming out of your IRA is, say, $2,000, okay. Let's say it's $2,000 a month. You're only going to pay taxes on that $2,000 per month when it comes out of your IRA as it's being paid as income to you. You don't have to pay taxes on the 135,000. So you're lengthening out that tax liability of the 135,000 which is also very cool. You have to be careful out there in the hinterlands of the internet and sales pitches and bad chicken dinner seminars that talk about tax-free this and all these tax advantages of things. The IRS is pretty clever, and they're watching the investment world with QLACs because the IRS helped introduce them to the treasury department. There's no gray area.
I mean, all the rules with QLACs apply, and that is legal. I just encourage you to be very careful of anyone out there who says they have a tax loophole that they found. They have not found it. QLAC is a legal tax strategy approved by the IRS and the treasury department that you can take advantage of.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly, book a call with me so we can discuss what works best for your specific situation.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.