How To Shield Up To 25% Of Your 401k or IRA From RMDs
Updated: Nov 7, 2020
Coming off your year-end scramble to make sure your RMDs were done in time?
If so, start the new year off right - shield up to 25% of your qualified money from RMDs until age 85. Take a look at the new 2020 QLAC limits.
After a nearly unanimous passage in the U.S. House of Representatives, the SECURE Act (Setting Up Every Community for Retirement Enhancement Act) has become law. The legislation was “attached” to a bipartisan spending bill with the goal of avoiding another government shutdown.
President Trump signed the SECURE Act into law on December 20th, 2019. With many provisions having gone into effect on January 1st, 2020, it will have big implications for retirement and taxes. As a result, retirees and working-age retirement savers can start seeing major changes as early as 2020.
All of that being said, the SECURE Act brings the most sweeping changes to the U.S. retirement system in a decade. Because of that, there is bound to be some confusion about what the act actually does and how it might affect people’s own retirement standard of living. Let's go over QLACs.
What are QLACs?
A qualifying longevity annuity contract (QLAC) is a special type of deferred income annuity. Starting in 2014, the IRS allowed individuals to buy QLACs with qualified (pre-tax) money from an existing 401(k) or IRA.
Not every annuity is a QLAC, however. And not every deferred or longevity annuity is a QLAC, either.
To satisfy the IRS's QLAC requirements, the product must be simple and straightforward: put money in now, pick a deferral period, pick your income and death benefit options (single or joint life, with or without a death benefit), and begin receiving distributions later.
You can also buy limited rider options for things like inflation adjustment and return of premium, which increase the overall cost of purchase.
Note that with QLACs, there are no variable interest rates, participation rates, floors, or ceilings (as you’d see with variable, indexed, or buffer annuities).
What does a QLAC do for me?
QLACs let you shift some of the money in your qualified retirement account into an annuity.
Why would you want to do this?
There are two main reasons.
First, you can delay required minimum distributions (RMDs) on the money in your QLAC. Without a QLAC, you'd be forced to start taking distributions based on the total value of that retirement account at age 72 (formerly 70 ½) - and paying income tax on those distributions.
Many individuals don’t need distributions at that age, and don’t want to pay tax on that money yet. With a QLAC, you won’t have any RMDs on premiums paid until age 85.
The second reason?
In a word, longevity. If you are worried about outliving your funds, a QLAC solves the problem. It provides guaranteed monthly income as long as you live. Plus, you get the amount you were promised at purchase, no matter what’s happened to the stock market or interest rate in the interim. You're effectively transferring that risk to the insurer.
What changed for 2020?
The IRS increased the dollar limit on allowable premiums paid, as of January 1, 2020.
As specified under Code Section 1.401(a)(9)-6 and Regs. Section A-17(b)(2)(i) of the Income Tax Regulations, the IRS increased the lifetime limit from $130,000 to $135,000.
The maximum amount you can pay into a QLAC is now the lesser of either: (a) $135,000, or (b) 25% of aggregated traditional IRA account values as of the prior December 31, minus premiums paid for other QLACs.