If you’ve been reading my blog, by now you already know Longevity Annuities are a unique way to “insure” your retirement by providing a guaranteed lifetime income starting at an age you select.
The newest player in the annuity marketplace is the Qualified Longevity Annuity Contract, or QLAC, and it provides very specific tax benefits. (To learn more about what QLACs are, check out “What Every Baby Boomer Should Know – Introducing QLAC.”)
Let’s delve into the value of the tax benefits QLACs provide. Intuitively one would expect significant savings by reducing the required minimum distributions (RMDs) from your retirement plan by 25%. This is because the investor is deferring not only the interest or investment return, but also deferring the principal (which the investor was previously available to deduct).
To point out the taxes on principal, I often ask knowledgeable people in the field, “What’s the rate of return on the IRA’s RMDs if: (1) the investments earn, say, 3%, and (2) the 65-year-old investor lives to age 95?”
Cutting to the chase, the answer is around .5% after tax. This means the investor barely gets his or her money back after tax. More