The IRS recently announced the 2018 cost-of-living adjustment (COLA) increases to contribution limits for IRAs and qualified plans. The premium limit for qualified longevity annuity contracts (QLACs) also increased from $125,000 to $130,000.

With the announcement of the increase, IRA owners who already own an IRA QLAC may be interested in making an additional purchase to increase the benefit.

With multiple QLAC purchases, it's the responsibility of the owner to make sure maximum premium limits are not exceeded.

The 2018 maximum IRA QLAC premium is the lesser of:

1. The dollar limit: $130,000
2. The percent limit: 25% of the retirement account balances

But, when planning multiple QLAC purchases, IRA owners need to know more. Specifically, they need to know:

1. The dollar limit applies per QLAC owner. In other words, total QLAC premiums should not exceed $130,000.
2. The percent limit (25%) is determined separately for IRAs and tax-qualified plans of a single employer (i.e., 401(k)s, 403(b)s, and governmental 457(b)s).

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 the maximum contribution amount, but excluded when calculating the required minimum distribution (RMD) for non-QLAC IRAs.

IRA QLAC Hypothetical Example

On December 31, 2016, Don had multiple IRAs (none of which were QLACs) that totaled $800,000 in value. In 2017, he purchased an IRA QLAC with a $125,000 premium. On December 31, 2017, his non-QLAC IRAs were valued at $685,000. Form 1098-Q showed the IRA QLAC FMV was $125,000. In 2018, he plans on making an additional premium to his IRA QLAC with the maximum allowable additional premium allowed. He has no other tax-qualified plan assets.

Calculation

The maximum additional premium Don can make to his existing IRA QLAC is $5,000, which is calculated as follows:

Step 1 - Determine the dollar limit

• $130,000 – (total cumulative IRA QLAC premiums paid)
• $130,000 – $125,000
• $5,000

Step 2 - Determine the percent limit

• [25% of IRA account balances (including the QLAC FMV)] – (total cumulative IRA QLAC premiums paid)
• [0.25 x ($685,000 + $125,000)] – $125,000
• $202,500 – $125,000
• $77,500

Step 3 - Determine the lesser of Step 1 and Step 2

• Lesser of $5,000 or $77,500
• $5,000

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, contact the Pacific Life Retirement Strategies Group at (800) 722-2333 or send an email to RSG@PacificLife.com.