A Tax-Friendly Way to Get Income for Life
You can use money in a traditional IRA to buy a deferred-income annuity — a move that can delay taxes and guarantee lifetime income.
Question:
I heard that you can use $130,000 in an IRA to buy a deferred-income annuity without having to pay taxes on the money. Have you come across this before?
Answer:
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
That sounds like a Qualified Longevity Annuity Contract, or QLAC. In 2018, you can invest up to $130,000 within a traditional IRA (or 25% of the IRA balance, whichever is less) in this special kind of deferred-income annuity. You’re not taxed on the move, and the money you put into the annuity is not included when calculating your required minimum distributions from the IRA after you reach age 70½.
You don't avoid taxes on the money forever, though. The taxable portion of the money you used is still subject to taxes when you start receiving income from the annuity. But the tax bite will be delayed if you postpone receiving income from the QLAC until you’re in your seventies or eighties. (You’ll still have to take RMDs from the IRA money that you didn't roll into the QLAC.)
With a QLAC, you invest a lump sum years before you need the income—say, in your sixties—and decide when you want to start receiving the money, usually in your seventies or eighties. Payouts continue for the rest of your life. So the QLAC not only removes a chunk of money from your RMD calculation but also guarantees that you won’t outlive your money.
For example, a 65-year-old man who invests $50,000 in a QLAC could receive about $11,116 per year for life starting at age 80, says Jerry Golden, founder of Go2Income, which compares payout rates for several insurers offering QLACs. The downside: If he dies just a few years after payouts begin, he may not receive as much as he invested—or he may receive nothing if he dies before payouts start.
Another option is a “life with cash refund” annuity. It provides a smaller payment per year, but it returns the balance of the investment to your beneficiary if you die before receiving at least as much as you invested. That option, in the above example, would reduce the annual payout to $9,215. You can run your numbers with the calculator at Go2Income.com.
For more information, see QLACs Can Deliver Late-In-Life Income.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
-
Average Net Worth by Age: How Do You Measure Up?
Financial advisors discuss the secrets to growing your net worth over time.
By Adam Shell Published
-
Three Charitable Giving Strategies for High-Net-Worth Individuals
If you have $1 million or more saved for retirement, these charitable giving strategies can help you give efficiently and save on taxes.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Getting Out of an RMD Penalty
retirement When your brokerage firm miscalculates your required minimum distributions, you have recourse.
By Kimberly Lankford Published
-
Borrowers Get More Time to Repay 401(k) Loans
retirement If you leave your job while you have an outstanding 401(k) loan, Uncle Sam now gives you extra time to repay it -- thanks to the new tax law.
By Kimberly Lankford Published
-
It’s Not Too Late to Boost Retirement Savings for 2018
retirement Some retirement accounts will accept contributions for 2018 up until the April tax deadline.
By Kimberly Lankford Published
-
How to Correct a Mistake on Your RMDs from IRAs
retirement If you didn't take out the correct required minimum distribution because your brokerage firm made a mistake, the IRS may show some leniency.
By Kimberly Lankford Published
-
Ways to Spend Your Flexible Spending Account Money by March 15 Deadline
spending Many workers will be hitting the drugstore in the next few days to use up leftover flexible spending account money from 2018 so they don’t lose it.
By Kimberly Lankford Published
-
Making the Most of a Health Savings Account Once You Turn Age 65
Making Your Money Last You’ll face a stiff penalty and taxes if you tap your health savings account for non-medical expenses before the age of 65. After that, the rules change.
By Kimberly Lankford Published
-
Reporting Charitable IRA Distributions on Tax Returns Can Be Confusing
IRAs Taxpayers need to be careful when reporting charitable gifts from their IRA on their tax returns, or they may end up overpaying Uncle Sam.
By Kimberly Lankford Published
-
When You Can Expect to Receive Your Tax Refund
taxes The quickest way to receive your tax refund is to file electronically and have the money directly deposited into your bank account.
By Kimberly Lankford Published