Government’s Decision Expands Retirement Flexibility


Ramesh Cherivirala

SUGAR LAND: It’s not often the federal government makes a decision that nearly everyone is happy with, but that’s what happened with a regulation that was recently finalized by the U.S. Treasury Department. Changes to the regulations under Internal Revenue Code section 401(a)(9) allow individuals the ability to defer the distribution of their qualified assets beyond age 70 ½ through the purchase of a Qualifying Longevity Annuity Contract (QLAC).

Generally, the new rules provide an exception to Required Minimum Distributions (RMDs) by allowing a QLAC to start making payments as late as age 85, meaning people can defer paying taxes on money that they may not need in early retirement. This is big news for those people who have been taking RMDs because they have to, not because they want to.

A QLAC can provide more flexibility for your retirement planning by allowing you to better match your retirement income to your needs, and the ability to control when taxes can be paid on your qualified assets. A QLAC will also ensure that you will not outlive your money, because as an annuity it provides guaranteed income for life.

There are some limitations to QLACs that you should know. Most importantly, there is a cap on how much of your qualified money you can put into a QLAC. Contributions are limited to the lesser of $125,000 or 25% of the owner’s qualified account balances, less previous QLAC contributions. The 25% limit applies on a plan by plan basis and to IRAs on an aggregate basis.  Also, QLACs can only be established through a deferred income annuity with no liquidity features.

Other important rules you should be aware of include:

Eligible accounts include 401(a), 401(k), 403(b), governmental 457(b) or IRA,

Income payments must begin no later than the first day of the month following the owner’s attained age 85.

The contract must state from inception that it is intended to be a QLAC.

Once income starts, the payments must satisfy RMD rules.

The contract cannot have any cash surrender value or commutation benefit

A QLAC can be a powerful tool for those who want more control of how and when they start taking money out of their qualified retirement accounts. With people living longer than ever before, the government has taken an important step in allowing people to have more flexibility with regard to their retirement assets. This is an opportunity that should be a serious consideration for many people nearing, or even in, retirement. Contact your tax/legal advisor for implications to your specific situation.

This educational third-party article is being provided as a courtesy by Ramesh Cherivirala.

For additional information on the information or topic(s) discussed, please contact Ramesh Cherivirala at  New York Life Insurance Company, 13135 Dairy Ashford Rd, # 550, Sugar Land, TX 77478; Cell: 713-875-4336.