Natalie and Bill are a married couple whose children are grown and financially self-sufficient. Today, Bill is 71 and Natalie is 73. Both still work. They live well and are currently earning enough with their combined salaries to take care of their immediate needs. Neither wants to stop working anytime soon. They would like their retirement assets to stay in their retirement accounts. Nevertheless, because they are both over age 70 and 1/2, under the law, They are forced to take taxable required minimum distributions -- RMDs.
Bill has 2 traditional IRAs, one with a beginning year balance of approximately $300,000 and another with $200,000. Natalie, for her part, has a regular IRA with a beginning balance of approximately $400,000. While Natalie and Bill are healthy and comfortable today, both of them want to find a way to make sure neither outlives their assets and becomes a burden to their children. They are also interested in reducing the amount of near-term RMD taxable income from their retirement accounts.
An attorney friend tells Natalie about a new type of investment contract, a Qualified Longevity Annuity Contract. The attorney explains that the maximum either Natalie or Bill may invest in a QLAC is 25% of his qualified IRA retirement assets, but not more than a total of $130,000. Bill learns that under QLAC IRA rules, he must aggregate his two funds, a total of $500,000, to compute this limitation. His overall QLAC limit is $125,000. Because of the aggregation rule, Bill can use one or both of his IRAs to make the total QLAC premium payment.
Since Natalie is the owner of her own traditional (not Roth) IRA, she may take 25% or $100,000 of her IRA balance of $400,000 and invest it in her own, separate, QLAC. Natalie's lawyer friend notes that the QLAC purchase is not a taxable distribution. QLAC taxable income arises only when the annuity distribution occurs. What's more, annuity payments from a QLAC are for life. A QLAC annuity owner cannot outlive this asset! The owner can select an annuity start date not later than his or her 85th birthday.
Natalie and Bill also discover from their insurance agent that they may purchase Joint and Survivor payment options for their QLAC annuities. This assures that if one of them dies, the other will continue to receive two QLAC payments for the rest of his or her life.
Based on this information, Bill and Natalie decide to move forward. They each make QLAC purchases prior to the year-end. Bill withdraws 25% of the total balance on both is IRAs but takes $125,000 from just his first IRA and purchases a $125,000 QLAC with a joint a survivor option. Natalie liquidates 25% of her IRA, and uses the $100,000 in proceeds to purchase a separate QLAC. Natalie and Bill name each other as primary beneficiaries.
Prior to the QLAC annuity purchase, Bill's RMD for the next year will be $19,531. Natalie's RMD will equal $16,807. But, because of Bill and Natalie's respective QLAC investments in the prior-year, Bill's RMD will go down to $14,648. Natalie's RMD will be $12,605. In total, the QLAC purchases enable the couple to reduce their IRA taxable income by $9,085 for the coming year. Effectively, this and future years' taxable income is deferred until the QLAC life annuity begins its distributions.
Natalie and Bill are happy with their decision. They believe the QLAC investment is a safe, tax- efficient means of assuring that they will not outlive their assets. If they die before their annuity Inception, their beneficiaries will receive a return of the premium paid. Even better, the longer they live, the better the return on their QLAC purchase! Bill and Natalie like the idea of being paid to live long lives!
Notice: The foregoing video and examples do not portray any one person’s situation. The dramatizations were prepared by the Company to introduce viewers to a new financial product, a Qualified Longevity Annuity Contract. Individual circumstances of a viewer are likely to vary from the examples in the videos. The videos are not tax or legal advice. The financial information, and calculations depicted in these videos are supplied from sources we believe to be reliable. However, we are unable to guarantee their accuracy. These materials are not intended to replace the viewer’s legal, tax and accounting advisors. Any viewer should seek advice from his or her qualified advisors prior to entering into a QLAC purchase. The Company accepts no responsibility for any outcome arising from a QLAC purchase or a failure to make a QLAC purchase. This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax penalties.