Monday, February 27, 2012
New Annuities Allowed Inside a Retirement Plan
On February 2, 2012 the IRS published proposed Regulations concerning QLACs – qualified longevity annuity contracts. These contracts would be purchased by and held within your 401(k), 403(b), 457 and IRA accounts.
NOTE: Roths however are not permitted to own a QLAC. Can you guess why? (The answer is below).
Longevity annuities provide life annuity payments, typically starting at age 80 or 85. In many cases, the life annuity is the only benefit the contract provides. As such, these are specialized contracts to aid against outliving your savings. The IRS requires certain bells and whistles before deeming them “qualified” to be owned inside your retirement account.
Why would someone put an annuity inside a retirement account? The IRS has given us at least one very good reason.
You can delay the minimum distribution rules (MRD) on a QLAC. Yes, you read that correctly. Normally, you have to begin taking distributions in the year you reach age 70 ½. A QLAC allows you to defer distributions until and no later than the month following your 85th birthday.
How will the minimum distribution rules work with a QLAC? You may remember that the normal rule for an MRD is to divide the retirement account balance by an IRS-provided factor for your age. The IRS is allowing you to exclude the QLAC from the balance in the retirement account.
EXAMPLE: If your account is worth $850,000, of which $95, 0000 is a QLAC, you will compute your MRD on $755,000 ($850,000 - $95,000).
The proposed regulations provide that the only QLAC benefit permitted after death is a life annuity. If the contract provides an annuity for a term certain or for a refund of premiums, it will not qualify as a QLAC.
There are restrictions; this is the tax code, after all. Premiums you pay for a QLAC are limited to the lesser of $100,000 or 25% of your retirement account. Bad things happen if you exceed this, so do not exceed the limit.
ANSWER: So why are Roths not permitted to own QLACs? Simple. Roths have no minimum distribution requirement.