QLACs: A Secret Weapon to Help Reduce RMDs

If you are one of many Americans who have salted away large sums of money in 401(k)s and IRAs, you face a tax dilemma. Once you retire, you must generally start taking required minimum distributions (RMD) when you reach age 70½. And the amount, determined by an IRS formula, can be substantial. For example, if you have $1 million in an IRA or 401(k), you must withdraw $36,496.35 at age 70½.

A QLAC isn’t a magic bullet. It’s a fixed annuity, and you cannot change your mind once you have made the deposit. You need to be certain that this is money that you do not need nor want to pay tax on prior to the date the income begins.

One important provision that you can include in your QLAC to protect yourself is an income start date change rider. This will commonly allow you to accelerate the payment of income to as short as five years after you made the purchase if you decide you need additional income. You’re forfeiting liquidity of your money that is deposited into the QLAC in return for being able to reduce the amount of your RMD to a maximum of your age 85.

Kim Franke-Folstad contributed to this article.