How This New Annuity Can Minimize Your RMDs in Retirement
You can now choose to invest some retirement account money in a deferred-income annuity.
Most retirees have two big concerns: outliving their savings and paying taxes on their withdrawals. Now there's a way to deal with both of those issues. A new type of annuity, called a qualified longevity annuity contract, or QLAC, lets retirees lock in income in the future and avoid taking taxable required minimum distributions (RMDs) on as much as $125,000 of their retirement savings.
QLACs provide a tax-advantaged twist on deferred-income annuities (also known as longevity insurance), which insurers have offered for several years. You usually invest in these annuities when you're in your sixties in order to receive guaranteed lifetime income starting 10 or 20 years down the road. But until recently, you couldn't delay that long if your money was in an IRA or a 401(k) because such accounts require that you start taking withdrawals at age 70 1/2. "We saw a tremendous cluster of people taking the payouts at age 70," says Ross Goldstein, managing director for New York Life, which has a popular deferred-income annuity. "They had no choice."
The Treasury Department changed the rules last year, permitting people to invest 25% of the balance of an IRA or 401(k) account (up to a total of $125,000) in a QLAC without having to take RMDs at 70 1/2. (You'll owe taxes on payouts, except to the extent they reflect after-tax contributions.) Nearly a dozen options from insurers, including American General, Lincoln Financial, MetLife, New York Life, Northwestern Mutual, Pacific Life and Principal, are now available.
A deferred-income annuity is one way to ensure you'll have extra money coming in later in life, when you may need it most, says Andrew Murdoch, president of Somerset Wealth Strategies, in Portland, Ore. "A lot of people are doing this as a way to minimize RMDs," says Murdoch. "They have enough other assets saved, and they want to defer the taxes as long as they possibly can."
Being able to count on guaranteed income in your eighties helps you plan how long the rest of your savings needs to last. It can also help pay for potential long-term-care costs and other expenses.
Choose the features. If you're interested in this type of annuity, you can roll money from your IRA into a QLAC. Or you may be able to invest in one through your 401(k) when you leave your job without rolling it over to an IRA, although few plans offer that option yet.
When you pick a QLAC, the key decisions are when to begin payouts and whether to include a death benefit. The longer you wait, the more you'll get. A 65-year-old man investing $125,000 in MetLife's QLAC, for example, will get about $33,000 per year if payouts begin at age 80; he'll receive more than $64,000 if he delays payouts to age 85 (women, who tend to live longer, receive less). But if the man dies before the designated payout age, he'll get nothing.
Adding a death benefit reduces your annual payouts. If the 65-year-old man chooses a return-of-premium death benefit, his heirs will get back the $125,000, minus any money he already received, but his annual payouts would drop to about $26,000 starting at age 80 or about $46,000 starting at age 85. Some insurers also let you continue payouts for your spouse after you die.
After you choose the features, compare payouts from several insurers, which can vary by more than 7%, says Jerry Golden, president of Golden Retirement Advisors, an annuity consultant. You can see prices and payouts with various options for several QLACs at www.go2income.com/qlac. Or contact insurers that sell primarily through their own agents, such as MetLife, New York Life and Northwestern Mutual.