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Retirement & Eldercare

Tips to Reduce Required Minimum Retirement Distributions and Extend Your Benefits?

by
Karen C. Drescher, CPA, CGMA
on
6/14/2017
Tips to Reduce Required Minimum Retirement Distributions and Extend Your Benefits?

Required Minimum Distributions, or RMDs, are a pain point for many boomers who have saved for retirement using IRAs and other qualified plans. These RMDs kick in when the account holder hits the age of 70.5, and initiate a process wherein they are required to take out a minimum amount from their plan every year or pay a penalty. The amount that they need to withdraw is considered taxable income unless it has previously been taxed, and is based on the amount that is in the account on December 31st of the prior year.  The reason that RMDs can be unpopular is that the account owner may not need the income at the time that the distribution is required to be taken, but depletes savings that may be needed at a later date. There are also obvious concerns about tax ramifications. 

The government does offer a solution to this problem in the form of an instrument known as a qualified longevity annuity contract, or QLAC. These accounts make it possible for older Americans to make their retirement funds last longer into their golden years, while at the same time reducing the amount of funds held in their IRAs and IRA-based plans (thus lowering the amount that needs to be distributed each year.)

QLACs are able to be purchased from funds in retirement accounts. They are essentially deferred-income annuity accounts that meet the limitations placed by tax regulations while at the same time reducing the year-end balance in retirement funds, and therefore the accompanying required minimum distributions. The annuity begins to be paid when the account older is at an advanced age, thus ensuring that additional funds are available further into retirement while avoiding the tax hit caused by the RMD income.

QLACs offer two different tax advantages into retirement the years. They are:

  • By lowering the balance in the qualifying funds used to make the purchase, the year-end value is also reduced and that means that the next year’s (and following years’) RMD will be reduced in turn. This is particularly true because the annuity factor used to calculate the RMD is age based. Here’s how it works: a 74-year old is calculated to have a remaining distribution period of 23.8 years If they have a year-end balance of $400,000, then their RMD for the following year is calculated as $400,000 divided by 23.8, or $16,807. If the same 74-year old spends $100,000 to buy a QLAC, their RMD would be calculated as $300,000 divided by 23.8, or $12,605, thus reducing their taxable income by $4,202 for that year. The impact would continue each year because the balance in the IRA would still be $100,000 lower than it had been, while the $100,000 would remain intact in the QLAC until the year that its retirement annuity benefits begin. In most cases, that is at the age of 85 years old.
  • The second benefit is that the tax due on the $100,000 in the QLAC does not begin until payments begin to be made to the account holder.

In order to qualify as a QLAC, these deferred-income annuities must meet certain requirements. These include:

  • Meeting a dollar limitation for the sum of the premiums paid on all QLAC contracts. This is either $125,000 or 25% of the account holder’s total non-Roth IRAs, whichever is less.
  • QLAC have a specific date by which distributions must begin being made. These dates vary, but generally start after the taxpayer turns 85, on the first day of the month following their birth date.

QLACs can be a valuable addition to your retirement strategy. For more information, speak to your financial advisor or get in touch with a qualified accounting professional.

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Karen C. Drescher, CPA, CGMA

Karen C. Drescher, CPA, CGMA

Whether it is helping a individual or a Georgia small business with their taxes, or offering to be a backstop through their difficulties, Karen is always there for her clients. When you are a client of Karen's, she always tries to make you feel comfortable in a casual and friendly environment.

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