Retirees who are looking to maximize their retirement savings may want to consider utilizing a Qualified Longevity Annuity Contract (QLAC). This often overlooked tool in the U.S. retirement code allows retirees to move a portion of their pre-tax IRA funds into a deferred income annuity. By doing so, they can exclude that amount from the required minimum distribution (RMD) calculation until age 85. The maximum amount that can be moved into a QLAC per person is $210,000 for 2026, up from the original $200,000 cap.
One of the primary benefits of utilizing a QLAC is the ability to reduce RMDs and potentially avoid higher Medicare IRMAA surcharges. For example, moving $210,000 into a QLAC from a $257,000 IRA can significantly lower the RMD base to $47,000, resulting in smaller mandatory withdrawals each year.
Furthermore, with the current 10-year Treasury yield at 4.7%, QLAC payout rates are at an attractive level compared to other investment options. These rates often surpass the average CD rate of 1.68%, making QLACs a potentially lucrative choice for retirees looking to secure their financial future.
It’s important to note that while QLACs offer several advantages, there are trade-offs to consider. For instance, QLACs are illiquid assets, meaning that the money cannot be withdrawn as a lump sum and cannot be reversed if health circumstances change. Additionally, inflation can impact the purchasing power of fixed QLAC payouts over time, unless an inflation rider is added.
Retirees interested in exploring QLACs should ask themselves three key questions: Do they have IRA funds that won’t be needed before age 85? Do they have enough non-QLAC assets to cover expenses in the interim? And is the quoted payout rate competitive with multiple insurers? It’s also essential to remember that the $210,000 limit resets each January based on inflation and that the strategy only works with pre-tax IRA and 401(k) dollars.
In conclusion, QLACs can be a valuable tool for retirees looking to secure their financial future and reduce their RMDs. By carefully weighing the benefits and trade-offs, retirees can make informed decisions about whether a QLAC is the right choice for their retirement savings strategy.
