IRA

Purchasing a Qualified Longevity Annuity Contract (QLAC): The Importance of Having a Prior Year-End IRA Balance

November 5, 2015

Learn about QLAC premium limits and how they're determined by year-end IRA account balances.

The maximum IRA QLAC premium limit is determined, in part, by using the prior year-end IRA account balances. So, when planning IRA QLAC purchases, be sure to check the prior year-end values.

The final QLAC regulations (effective July 2, 2014) expand planning opportunities for those looking to postpone required minimum distributions (RMDs), and manage income and longevity risks. The regulations provide guidance regarding how IRA owners can use deferred income annuities, postpone distributions beyond age 70½, and comply with RMD rules.

For a contract to qualify as an IRA QLAC, there are conditions that must be met. One condition is that premium payments cannot exceed particular limits. Specifically, total QLAC premiums cannot exceed the lessor of $125,000 (indexed for inflation), or 25% of the owner’s retirement accounts. The 25% limit is applied to account types separately. For QLACs funded with IRA assets, the 25% limit is based on the total IRA1 value as of December 31 of the year prior to the year QLAC is purchased. This means if one did not have a prior year-end value (i.e., no IRA assets), an IRA QLAC cannot be purchased during the current year.
1All IRAs (including SEP-IRAs and SIMPLE IRAs) other than Roth IRAs. 

To illustrate, here are two hypothetical scenarios.

 

Scenario 1

Tom, age 73, has no IRA and a 401(k) balance of $600,0002. He is retiring and planning to roll his 401(k) balance to an IRA this year. He is concerned about longevity risk, wants to postpone RMDs, and would like to purchase a QLAC once the funds are in his IRA.
2Tom does not own a QLAC, and his 401(k) plan does not offer a 401(k) QLAC.

 

Analysis

Since Tom had no IRA balance at the end of last year, he cannot purchase an IRA QLAC this year. By rolling his 401(k) funds into an IRA this year, he may purchase an IRA QLAC next year. At that time, his maximum IRA QLAC premium payment will be $125,000, which is the lessor of $125,000 or 25% of his total IRA account balance3 as of the end of this year.
3Assumes zero growth.

 

Scenario 2

Bonnie had IRAs valued at $440,000 at the end of last year (which includes an existing IRA QLAC with a fair market value of $70,000).

 

Analysis

Since the maximum IRA QLAC premium payment allowable for Bonnie this year is $110,000 (lessor of 25% of $440,000 or $125,000), the maximum additional premium payment she can apply to the existing or a new IRA QLAC is $40,000 ($110,000 minus $70,000).

If an IRA QLAC is being considered, the prior year’s IRA account balances must be sufficient to allow the purchase. Explaining this to clients can open an opportunity for you to uncover more information about all their retirement accounts and position their assets as needed.

QLACs can be an important part of a retirement income plan. For answers to questions regarding maximum QLAC premium-payment rules, or any other QLAC issue, If you have any additional questions, please feel free to contact Retirement Strategies Group at (800)722-2333, ext. 3939, or e-mail us at RSG@PacificLife.com.

 

 

In order for the contract to be eligible as a QLAC, certain requirements under Treasury Regulations must be met, including limits on the total amount of purchase payments that can be made to the contract. Qualified contracts, including traditional IRAs, Roth IRAs, and QLACs are eligible for favorable tax treatment under the Internal Revenue Code (IRC). Certain payout options and certain product features may not comply with various requirements for qualified contracts, which include required minimum distributions and substantially equal periodic payments under IRC Section 72(t). Therefore, certain product features, including the ability to change the annuity payment start date and to exercise withdrawal features, may not be available or may have additional restrictions.


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