Using A QLAC To Reduce Your RMDs: A Highly Questionable Strategy

Summary

• Converting IRA funds into a Qualified Longevity Annuity Contract, referred to as a QLAC, reduces the value of your IRAs used to determine your annual required minimum distributions, or RMD.
• Understanding the pros/cons of using a QLAC is critical since once you fund a QLAC, they cannot be reversed and getting funds back can be delayed up to 15 years.
• If your goal is to keep your RMD off your 1040, I will cover a second option available. Also, two options for shifting where the tax hit occurs.

Introduction:

In my article on managing my IRAs in retirement (Now Retired - Setting Investment Strategy For Our IRA Accounts), I mentioned using a QLAC but didn’t go into detail about what they are. Some readers questioned why someone would want to use one just to delay required minimum distributions. The purpose of this article to help answer that question.

What is a QLAC?

A QLAC is a deferred annuity funded with an investment from a qualified retirement plan or IRA. QLACs provide guaranteed monthly payments until death and are shielded from the downturns of the stock market. Keeping RMDs off your taxes is the main reason for a QLAC in your qualified plan, as the value of the QLAC is excluded from the RMD calculation up until the year of annuitization, which can be no later than age 85; thus your "reprieve" covers a period of slightly less than 15 years at most. In general, the QLAC amount excluded from the annual RMD calculation is limited to the lesser of $130,000 or 25% of your retirement account balances. All other assets in the account will still be subject to the normal RMD rules.

Comparing taking RMDs versus QLAC

This is based on moving $25,000 from your IRA to a QLAC at age 70 and not taking annuity payments until the age of 85. It shows tax savings based on 25% and 35% rates. To simplify, I assumed RMDs were spent and not reinvested which would increase what the QLAC would need to return to justify using one.

Age	RMD Factor	Account	RMD	5% growth	25% tax	35% tax
70	27.4	$25,000	$912	$1,204	$228	$319
71	26.5	$25,292	$954	$1,217	$239	$334
72	25.6	$25,554	$998	$1,228	$250	$349
73	24.7	$25,784	$1,044	$1,237	$261

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.