IRS Regulations finalized in 2014 provide some relief for individuals who want to stretch out their retirement funds by generally allowing taxpayers to use up to the lesser of 25% or $125,000 of their retirement account to purchase a qualified longevity annuity contract (QLAC) within the account. The amount used to purchase the QLAC is subtracted from the account balance and would thus reduce the RMD from the retirement account each year until a specified time in the future when distributions must begin from the annuity.
Although not a perfect solution to not taking distributions, a QLAC can in effect delay the distributions associated with funds used to purchase the QLAC until as late as the pre-determined date for the start of the annuity payments, but no later than age 85.
As example, Dan, who is age 72, has a traditional IRA account with a balance of $700,000. From the IRS annuity table, for age 72, Dan has an expected distribution period (life expectancy) of 25.6 years, and his RMD for the year would be $27,344 ($700,000/25.6). However, Dan could have purchased a QLAC in the amount of $125,000 (the lesser of 25% of $700,000 or $125,000) with IRA funds prior to the end of the year, thus reducing his IRA account balance currently subject to mandatory distribution to $575,000. As a result his RMD for the year would be $22,461. In addition his QLAC would begin distributions at whatever date Dan selected for the start date, but at least by age 85.
Since Social Security (SS) income becomes taxable when one-half the taxpayer’s SS benefits plus the taxpayer’s other income, including non-taxable interest income, exceeds $25,000 ($32,000 for married taxpayers filing jointly), using a QLAC to reduce a taxpayer’s RMD income could actually reduce the tax on the taxpayer’s SS income.
QLACs do not apply to Roth IRAs since there are no RMD requirements and the income is generally tax-free.
Although many taxpayers are not fans of annuities, they do provide a guaranteed income for life and address the risk of them outliving their assets as well as delaying distributions to a later time for those who are still working or have no current need for distributions.