Money Matters

Delaying RMDs from Your IRA: There’s Only One Way to Do It

When you reach age 70½, you must start taking required minimum distributions (RMDs) from your IRA, 401(k), SEP or other retirement account. The extra income may be nice, but there are drawbacks.

If you don’t need the income, RMDs cause two problems: they erode the value of your retirement accounts and increase your taxable income.

There is just one way to reduce your RMDs: buying a qualified longevity annuity contract. A QLAC works for people who want to keep more of their retirement plan intact and tax-deferred.

A QLAC is a type of deferred income annuity designed to meet specific IRS requirements that qualify it. The money in the QLAC is excluded from assets on which future RMDs are calculated.

QLACs have an accumulation or deferral phase where interest earnings are held and reinvested by the insurance company, and a payout phase, also called annuitization. Future income is guaranteed. You know the expected payout before depositing your funds.

You pay a single premium and then choose when to start receiving a stream of lifetime income—by age 85 at the latest. The QLAC thus lets you delay RMDs on some of your retirement-plan money up to 14 ½ years.

For instance, at age 75, $125,000 in a QLAC avoids $5,459 in RMDs you’d otherwise have to accept. At age 80, you’d be exempt from $6684 in RMDs.

Delaying RMDs isn’t the only benefit. The biggest advantage is that you’ll create a larger stream of income you can’t outlive. The earlier you buy the QLAC, the longer you’ll get to build up principal and the bigger payout you’ll ultimately get.

Because you’ll have a new source of guaranteed income coming available at the time of your choosing, you may be comfortable taking more market risk with other assets in your plan.

Since the QLAC is a great deal for retirees who can afford to defer some income, the IRS imposes strict limits. Over your lifetime, you cannot allocate more than 25% of the total of all your IRAs or $125,000, whichever is less, in a QLAC. In future years, the $125,000 limit will be adjusted for inflation.

As with any deferred income annuity, you’re no longer in control of the principal with a QLAC. Your money is tied up because you made a deal with the insurer that gives you some great benefits in exchange.

You can choose an individual or a joint lifetime payout, with the latter paying out income until the second spouse dies. The joint payee must be a spouse, which satisfies IRS death-transfer rules. There’s also a cash-refund option, in which beneficiaries can get a lump-sum payout for any of the initial deposit premium not yet paid out at the death of the annuitant(s).

The $125,000/25 percent limit is per person, points out. For example, if the husband has $600,000 in his IRA, he could allocate up to $125,000 to a QLAC. If the wife has $350,000 in her IRA, she could put up to $87,500, or 25 percent, in a QLAC.

The ability to exempt some retirement-account money from RMDs via a QLAC was authorized by a U.S. Treasury Department ruling on July 1, 2014.

Ken Nuss is the founder and CEO of AnnuityAdvantage. Nuss entered the financial services industry in 1986. In 1999, he launched the AnnuityAdvantage website to help people looking for their best options in principal-protected annuities. Today, AnnuityAdvantage is a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. More information is available at https://www.annuityadvantage.com.