Clients Hate RMDs?

When I talk to my CPA colleagues, I ask them if they are looking forward to the calls to their clients to tell them their RMD (required minimum distribution) amounts, and the taxes due.  Hey, I’ve been there, don’t give me that look!

For those clients who don’t need all, or even any of their RMDs, that call can be extra special.  Am I right?  I let them know there is still time to make that call a little more pleasant by telling their clients about QLACs and how purchasing this new type of annuity can save them thousands in taxes, maybe save a bunch on Medicare, and increase their guaranteed income in later life.

Since we shared information about Qualifying Longevity Annuity Contracts, or QLACs in our book, The Longevity Annuity Revolution with colleagues John Carroll and Jim Sullivan, CPA, we’ve learned that we have a long way to go until people who should know about QLACs are informed as to what they are and how they work.

What Are QLACs?

On July 1, 2014, the Internal Revenue Service and the Treasury Department released final regulations on the treatment of qualifying longevity annuity contracts, or QLAC’s.  These final regulations provide an exception to the required minimum distribution (RMD) rules of Internal Revenue Code Section 401(a)(9).

The IRS recognizes the risk that millions of Boomers may outlive their retirement assets and if they don’t plan properly, will be left living on Social Security and a small pension, if they are lucky. We believe that QLACs will lead the way to frank discussions about how these and other longevity annuities will revolutionize retirement income planning.

This exception allows individuals to exclude up to the lesser of 25% of account balances of IRAs, 401(k) and other tax-favored retirement plans, or $125,000, from the computation of their RMD.  To qualify for this reduction, the individual must purchase a deferred income annuity (DIA) that qualifies as a QLAC.

A New Type of Annuity

To qualify as a QLAC, the DIA must meet certain requirements, such as no cash value, no surrender withdrawal or commutation features.

Thus, the insurance companies must manufacture a product that is low cost without certain features people know to seek in an annuity contract.  The Journal of Accountancy goes as far as stating that the new regulations create “a new type of annuity.” (

QLAC Examples

The QLAC specifies payments are to begin at a specific age, no later than age 85.  These payments will last for the rest of the person’s life. Prior to these regulations, all DIA’s in qualified accounts were subject to RMDs at age 70 ½.

As shown in the examples below, a relatively small premium paid today will generate not only years of tax benefits, but a strong stream of insured future income.

Example I

A man age 70 1/2 in 2015 (who just learned what his taxes will be on his full RMD) purchases a QLAC with a Return of Premium option for $125,000 and elects to defer monthly payments until he reaches age 85 at which time he will receive $2,066 per month, or $31,921 per year for  the rest of his life.

If he dies before age 85, or before the total benefit payments received do not equal (or exceed) the purchase price, then the difference will be paid to a beneficiary in a lump sum. If he lives to age 88 or older he will have received the full amount of his initial premium and then some.*

If he opts not to have a ROP, his monthly benefit would be $4,048 or $48,576 per year, for life.

Example II

A single woman age 66 with no immediate heirs purchases a QLAC for $125,000, without the Return of Premium (ROP) option, and elects to defer monthly payments until she reaches age 85 at which time she will receive $4,313 per month or $51,760 per year for the rest of her life.  If she should die before age 85 no payments are made. If she lives to age 88 she will have received the full amount of her initial premium and then some.*

If she opts for a ROP, her monthly benefit would be $2,988, or $35,858 per year for the rest of her life.

*For illustration purposes only. Actual contract values may be higher or lower depending on a number of factors.

RMD Reduction

By excluding the value of QLAC’s from the account balances used to compute RMDs, an individual can increase his or her tax-deferral by delaying QLAC payments up until age 85.  If an individual maximizes a QLAC purchase of $125,000 by age 70 ½, and starts receiving payments at age 85, he or she would defer over $90,000 in income.

Think of this: A deferral of over $90,000!

Year Age Premium Divisor RMD
1 70 $125,000 27.4 $4,562
2 71 $125,000 26.5 $4,717
3 72 $125,000 25.6 $4,883
4 73 $125,000 24.7 $5,061
5 74 $125,000 23.8 $5,252
6 75 $125,000 22.9 $5,459
7 76 $125,000 22.0 $5,682
8 77 $125,000 21.2 $5,896
9 78 $125,000 20.3 $6,158
10 79 $125,000 19.5 $6,410
11 80 $125,000 18.7 $6,684
12 81 $125,000 17.9 $6,983
13 82 $125,000 17.1 $7,310
14 83 $125,000 16.3 $7,669
15 84 $125,000 15.5 $8,065
Total $90,790


QLACs will provide flexibility in retirement income planning and will help protect the individual from outliving his or her savings.  This is a tremendous opportunity.  Many retirees complain about their RMDs and do not really need the money.  Worse, their RMDs may push them into a higher tax bracket, trigger taxes on their Social Security, and increase their Medicare costs.

While single life QLACs without a ROP provide the highest payments, most people are reluctant to do without the ROP option and/or purchasing a joint life annuity if married.  One consideration is that QLACs provide a one-time change to the payment start date, with up to 5 years earlier or later making it reasonable to consider initially starting payments at age 80 to give the optimal flexibility.

To request an example illustration for yourself, or for illustrations for a client, click on this link and fill out the simple form.   Or, as the form says, give Will Teague a call or send him an email if you have questions or want illustrations and don’t like to fill out forms.  Will is my son and is fully licensed, so give him some work to do!

All the best to you and yours this holiday season!