The new IRS rules exempt the premium paid for any annuity contract that meets the stated guidelines for QLACs from future RMD calculations.
Qualified Longevity Annuity Contract (QLAC)
The IRS recently released new rules regarding longevity annuities. The new rules, announced July 2014, are meant to address the financial risks of increasing life expectancy. With longer life expectancies, there’s an increasing risk that retirement assets will be insufficient to meet the demands of a longer retirement. Under the old guidelines, the IRS required certain qualified plans, including IRA annuities, to begin Required Minimum Distributions (“RMDs”) from an individual’s entire account balance by April 1 of the calendar year following the later of one of two dates: the calendar year in which the employee attains age 70.5, or the calendar year in which the employee retires.
There are certain restrictions an issued annuity contract must comply with to be considered a QLAC. For example, the maximum amount a customer can allot to a QLAC contract is the lesser of 25% of the participant’s qualified account values (which AIG interprets to mean 25% as of 12/31 of the previous calendar year), or $125,000. Another example is that the deferred income annuity’s planned start date can be no later than the first day of the month following the employee’s 85th birthday. On this page you will find links to several resources related to the new IRS ruling, the rules for a contract to be considered a QLAC, and the QLAC-friendly product being offered by AIG. Other companies are expected to offer QLAC policies in the future, but for the time being AIG has the only known QLAC-qualified annuity contract among LFG’s core carriers.
For customers, the implications of the new QLAC rule are that they can now compartmentalize a portion of their qualified assets away from RMD calculations. By doing so they can accomplish at least 2 things. First, they can defer the tax burden that distributions from these qualified accounts would presumably bring. Second, they can potentially be better positioned to address the risk of outliving their assets.
For annuity distributors, the implications of QLAC are that customers have at least one more reason to consider purchasing an annuity. Currently, there are only a couple of carriers offering QLAC: AIG and Lincoln are chief among them. Most agents and many CPA’s are not yet aware of these new rules, and by sharing the news with them it can increase your credibility and perceived value.