Our prior post titled Purchasing a Qualified Longevity Annuity Contract (QLAC): The Importance of Having a Prior Year-End IRA Balance provided information on determining an owner’s maximum IRA QLAC premium.
To review, the maximum IRA QLAC premium is the lesser of:
But, when planning multiple QLAC purchases, IRA owners need to know more. Specifically, they need to know that:
For IRA QLACs, when additional purchases are considered, one also must factor in not only 25% of the total fair market value (FMV) of IRA account balances,* but also existing IRA QLACs (both determined as of the December 31 balance of the prior year).
*Including SEP-IRAs and SIMPLE IRAs, but not Roth IRAs or inherited IRAs.
It is important to note that the IRA QLAC FMV is included to determine maximum contribution amount, but excluded when calculating the required minimum distribution (RMD) for non-QLAC IRAs.
Each year, the owner can confirm total premiums and the FMV of an IRA QLAC using IRS Form 1098-Q. This tax form will be furnished to owners by January 31 of the following year.
On December 31, 2014, Ben had multiple IRAs (none of which were QLACs) that totaled $800,000 in value. In 2015, he purchased an IRA QLAC with a $100,000 premium. On December 31, 2015, his non-QLAC IRAs were valued at $685,000. Form 1098-Q (2015) showed the IRA QLAC FMV was $95,000. Early 2016, he purchased a second IRA QLAC with a $10,000 premium. He plans on purchasing a third IRA QLAC in May 2016, with the maximum allowable additional premium. He has no other tax-qualified plan assets.
The maximum additional premium Ben can use for the third IRA QLAC purchase is $15,000, which is calculated as follows:
Step 1 - Determine the dollar limit
Step 2 - Determine the percent limit
Step 3 - Determine the lesser of Step 1 and Step 2
QLACs can be an integral part of a retirement income plan. And, it is important for owners to be sure that premium limits are not exceeded.
For answers to questions regarding QLAC premium limits or any other QLAC issue, please feel free to contact Retirement Strategies Group at (800)722-2333, ext. 3939, or e-mail us at RSG@PacificLife.com.
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