Advertisement
retirement

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:

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.)

Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for paying estimated taxes, IRA or HSA contributions, and other deadlines, there's more to do by July 15 than just filing your feder…
July 14, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Tax Day 2020: When's the Last Day to File Taxes?
tax deadline

Tax Day 2020: When's the Last Day to File Taxes?

Thanks to the coronavirus pandemic, the 2020 tax deadline was pushed back to give taxpayers (and tax preparers) more time to file returns.
July 14, 2020

Recommended

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for paying estimated taxes, IRA or HSA contributions, and other deadlines, there's more to do by July 15 than just filing your feder…
July 14, 2020
Tax Tips for Last-Minute Filing
tax deadline

Tax Tips for Last-Minute Filing

As you scramble to beat the July 15 tax return filing deadline, here are some pointers to bring your stress level down.
July 14, 2020
When Are 2020 Estimated Tax Payments Due?
tax deadline

When Are 2020 Estimated Tax Payments Due?

If you're self-employed or don't have taxes withheld from other sources of taxable income, it's up to you to periodically pay the IRS by making estima…
July 14, 2020
Is an Immediate Annuity for You?
annuities

Is an Immediate Annuity for You?

Before buying, ask some key questions to learn exactly what you’re getting and how this type of annuity can create reliable retirement income.
July 10, 2020