The QLAC Delaying Strategy for RMDs

Workers can spend most of their careers building their retirement accounts. As they reach their 70s, retirement account holders will be required to start taking out what are known as required minimum distributions (“RMDs”), which are based on their life expectancy.       

Unfortunately, the holders have very little control over managing the minimum amounts that need to be distributed. However, there is a strategy that involves the use of a qualified longevity annuity contract (“QLAC”) that can delay at least a portion of the retirement account from being included in the RMD calculation. A QLAC allows for a transfer of traditional IRA funds to be used to purchase an annuity. The annuity product allows distribution of the amount placed in a QLAC to be delayed until a future date but no later than the person's 85th birthday. In other words, the amount that has been transferred to buy the QLAC doesn't have any required minimum distributions until the predetermined payout date for the annuity—the latest being when the person reaches age 85.

An annuity is a contract purchased from an insurance company in which the buyer pays the insurance company either a lump sum or a series of premiums. At some point in the future, the insurance company pays back the annuity owner—called the annuitant—based on the annuity contract.

Another benefit of a QLAC is that it allows a spouse or someone else to be a joint annuitant, meaning that both named individuals are covered regardless of how long they live. This can act as a tax strategy to delay the RMDs and provide lifetime cash flow streams for the joint annuitants.

The IRS sets a maximum amount that can be used to purchase a QLAC. In 2021, an individual can use up to 25% or $135,000 (whichever is less) of their retirement savings account to buy a QLAC.

For example, as of the date of this article, a calculator on Fidelity’s website showed that a $135,000 QLAC investment at age 70 and held until age 85 would provide a yearly lifetime payout of $21,000. If one of the joint annuitants lived until age 95, this would amount to $210,000 in total payments.    

This product could be used as a potential inflation hedge as well as an income stream for long-term care planning. Note, too, that a married couple could each set up their own QLAC and assign their spouse as a joint annuitant, which would double the aforementioned results.