Category: Annuity - PFwise.com

Can I 1035 Exchange a Joint Owned Annuity to an Annuity Under My Name Alone?

4/21/2021

Q: I own an annuity with my husband as joint owner and joint annuitant. Is a Section 1035 exchange to an annuity in my name alone possible?

A: Probably yes, although since some uncertainty exists, the annuity companies involved in the transaction will likely not cooperate in the exchange.

Code Section 1035 allows for a tax-free exchange of a life policy for a nonqualified deferred annuity (NQDA) or for an exchange of one NQDA for another. Section 1035 itself does not provide much detail regarding valid exchanges. The lack of detail has caused taxpayers and carriers to rely on various regulations, rulings, and company practices to fill in the blanks regarding what is a valid exchange.

One thing we know for sure is that an exchange must be done directly between the surrendering and issuing companies—and the client must not personally take control of the money during the process. As a practical matter, that means both carriers must agree that the proposed transaction is a Section 1035 exchange. If one of the carriers does not believe the transaction qualifies, it will stop cooperating in the Section 1035 process, and the exchange will fail.

The other things we believe we know about Section 1035 exchanges are: • The policyowner must be the same both before and after the exchange.
• The insured must be the same both before and after an exchange of life policies.
• The insured must be the same as the annuitant on a life for annuity exchange.
• The annuitant must be the same both before and after an exchange of an annuity.

Based on what we think we know, an exchange described in the question does not appear to be a valid exchange—and thus it would be rejected. Why did we say such an exchange might be possible?

The answer is that another section of the Tax Code—Section 1041—says that transfers of assets between spouses are tax-free. If you mash together Code Sections 1035 and 1041, they make a pretty good case that the transaction described would be income tax-free.

However, since the IRS has never explicitly said such a transaction is tax-free, most carriers will reject combining the logic of both Code sections to achieve the desired tax result.

10 Benefits of the Best SPIA

3/11/2021

For people who seek a retirement income stream now from a selection of payout options, SPIA (single premium immediate annuity) is a good choice.

There are many benefits: Multigenerational income strategies. Non-spousal joint life payouts. Corporate and trust ownership. That’s just three benefits, there are more as the flyer shows below.

Rethink SPIAs in Retirement

1/31/2021

Based on this article from Advisorperspectives.com, the role of Single Premium Immediate Annuities (SPIAs) should be relooked at.

The Traditional View of SPIAs
The traditional view of Single Premium Immediate Annuities (SPIAs) is that, as a vehicle that turns a lump sum into a fixed and guaranteed (but otherwise illiquid) stream of monthly payments for life, they are best used for retirees that are focused entirely and solely on generating steady guaranteed income in retirement (to the point that they’re willing to give up the liquidity and any portfolio upside potential).

And in practice, that trade-off isn’t actually very popular for most, with LIMRA statistics showing meager adoption of SPIAs (compared to other annuity alternatives), with sales that actually fell dramatically in 2020 (despite the market volatility and what is otherwise usually a flight to safety during times of market fear).

The New View of SPIAs
Yet as the author notes that the value of SPIAs isn’t just their lifetime guarantee, but the fact that SPIAs are a “fixed income” vehicle that pays not only principal plus interest like a bond but also a “mortality credit” (the benefit of pooled longevity reduced by the insurance company’s own expenses, otherwise known as the portion of annuity payments that are shifted from those who pass away early to support the continued payments to those who live longer), which may be trivial early on but after 25 years (for a 65-year-old annuity purchaser) can amount to 17% of their ongoing payments (and by age 100 rises to almost 39% of their cumulative payments). Which means another way to view an SPIA is not as a guaranteed income vehicle for retirement lifestyle spending, but essentially as a bond alternative that, once annuitized, is then reinvested into equities as the payments are received and the annuity effectively self-liquidates.

The appeal of such a strategy is that it both helps to mitigate sequence of return risk (by buffering the early years of volatility with the guarantees of the annuity payment), helps to ameliorate what is otherwise a significant inflation risk of SPIAs (as the payments aren’t there to maintain purchasing power, but to reinvest back into equities that grow to maintain purchasing power over time), and provides more flexibility (as it doesn’t entail fully liquidating the portfolio but simply carving off a portion of it) while providing a better outcome for those who live the longest (and get the most mortality credits to out-compound the return of just buying bonds alone).

Where to Find Guaranteed Returns in a Low Yield Environment

1/30/2021

With Treasury Bills providing a mere single-digit-basis-point yield, money market funds paying so little that most have had to waive some or all of their internal fees to avoid having a negative yield (or have outright closed to new investors), and CDs yielding little more, where to find satisfactory yields?

Try MYGAs
Based on this article from Advisorperspectives.com, one key option is the use of the ‘traditional’ fixed annuity… specifically, the kind that pays multi-year guaranteed rates, often called MYGAs (Multi-Year Guaranteed Annuity) for short. As in practice, many MYGAs are still paying yields as high as nearly 3%, while even longer-term 5-year CDs are yielding barely over 0.3%.

Of course, the reality is that annuity yields aren’t fully guaranteed, in that there’s a credit risk of the annuity company itself – and a not-surprising risk-based tendency that higher-quality insurers pay lower yields, while the lower-credit-quality (i.e., higher-risk) annuity carriers are the ones offering the highest near-3% yields. In practice, insurance companies have additional backstops (e.g., state guaranty associations), can actually benefit from their illiquidity (i.e., annuities with surrender charges or similar exit fees may be unappealing for some, but actually help ‘lock-in’ the money for the insurance company to be able to offer higher yields, akin to the higher yield for longer- versus shorter-term CDs). And MYGA yields still exceed yields from corporate bonds with similar credit ratings and maturities.

Your Retirement Savings Might Not Last As Long As You Think

12/24/2020

The Setting Every Community Up for Retirement Enhancement Act of 2019 (Secure Act) is bringing this theory to defined contribution plans such as 401(k)s. A new rule would require plan sponsors to provide workers with an annual disclosure showing what their monthly (and lifetime) income would be if they converted their plan savings to an annuity with a guaranteed stream of income. The law is designed not necessarily to push people into buying annuities but to illustrate how their funds will need to stretch over their lifetime.

People hear that they have to accumulate a lot of money for retirement. As time goes on and their 401(k) balances increase, they become overconfident that they have enough money to retire. But, they need to begin asking themselves: "What would it produce in income down the road?”

TIAA provided an example of what someone around age 39 might see on his or her statement. Let’s say as of June 2019 the worker had $87,851 saved. Based on a monthly contribution of $420 that increases each year with inflation, and a number of other assumptions such as rate of return, at 65 the person is estimated to have a balance of $829,150 (or $382,585 in today’s dollars).

The hypothetical annuity payment would be $4,586 (or $2,116 in today’s dollars). This assumes a single life annuity with a 10-year guarantee period and 4 percent interest rate.

But what if your 401(k) account has just $200,000 when you retire?

If such a person annuitizes $200,000 at 65 this might produce a hypothetical payment of $13,274 a year, or $1,106 per month based on a 6.6 percent payout rate (including interest rate and return of principal based on life expectancy). Although, the actual annuity payment will depend on current interest rates when annuitized.

The 6.6 percent income rate means that for every $100,000 annuitized, the annualized income will be $6,600. The 4 percent interest rate is used in the calculation of the annuity factor to come up with the payment amount. With a lifetime immediate annuity, which is what would be used for the illustrations under the Secure Act, the payout rate is different from the rate of return. The actual realized return depends on how long a person lives, beyond the guarantee period.

The Secure Act also dictates that there would be disclosure within the example to make sure workers understand that the calculations depend on numerous factors that can affect the estimates they are given.

The Labor Department is required to issue rules instructing plan administrators on the assumptions that will be used to estimate a lifetime income stream. The illustrations would estimate retirement benefits that might be paid as a life annuity to a retirement account holder and a survivor annuity over the life of the participant’s surviving spouse, child or dependent. The plan administrators would assume the plan participant and a spouse were the same age, and a single-life annuity would also be shown.

Done right, this new requirement could be a useful reality check. Rather than focusing just on your total balance, which could give you a false sense of financial security, this lifetime income illustration could bring clarity to how you view retirement savings. Keep in mind your money may have to last you several decades in retirement.

This might shift people’s behavior and help them realize they need to save more for retirement.

5 Annuity Options In One Map

11/23/2020

While all annuities are designed to provide income, there are different kinds to align with your accumulation goals and how much risk you’re comfortable taking.

Immediate Annuity
Carrying the lowest risk, immediate annuities convert your premium payment to a guaranteed income stream for life, or for a specific period.
Fixed Annuity
Fixed annuities offer a fixed interest rate that’s guaranteed for a certain time period. The guarantee may appeal to you if you’re willing to sacrifice the potential for higher returns when the markets rise.
Fixed Indexed Annuity
In the middle of the spectrum, fixed indexed annuities have become increasingly popular with people who have a moderate appetite for risk. You can earn interest credits based in part on the upward movement of a stock market index while enjoying protection of a zero percent floor. If the net change in the index over a given crediting period is negative, you would earn zero interest credits for that period, but never less than zero.
Registered Index-Linked Annuity
These products are designed for people with a higher risk tolerance. Registered index-linked annuities offer the potential for index credits tied to index performance while providing a measure of protection from market loss.
Variable Annuity
This type carries the highest level of risk because your money is invested directly in the market. Variable annuities offer the highest growth potential of any of the products on the annuity spectrum, but they also leave you fully exposed to market loss.

Combination of Benefits of Fixed Index Annuity Products

11/6/2020

The fixed index annuity products usually offer a powerful combination of benefits that help protect against many of today's common retirement concerns, as summarized in the chart below.

Guaranteed Growth Rates for Next 3 or 5 Years

10/26/2020

GuaranteeShield from American Equity

Guaranteed rate for 3 or 5 years

2.40% or 2.65% fixed rate

This is a very good product for retirees who are looking for safety and guaranteed growth in today's low rate environment.

Doubling Retirement Income For Life

10/25/2020

Many retirement portfolios continue to be impacted during these uncertain times. Here is a product from AIG that you can secure an income base that is guaranteed to double after 10 years when the rider has not been activated. And when you are ready for income, you can count on up to 5.6% withdrawals for life.

Why Single Premium Immediate Annuity Could Be a Good Solution Even With Low Rates

10/16/2020

The financial planning magazine has a great and easy to read article that properly titled "A skeptic takes a second look at Single Premium Immediate Annuities (SPIAs)".

The author went from being a skeptic of SPIA to identifying the right people for SPIAs, and analyzed the Pros and Cons of SPIA.

Pros of Single Premium Immediate Annuities:

Longevity insurance
Peace of mind
Competitive expected return
Increased safe spend rate for remainder of portfolio

Cons of Single Premium Immediate Annuities:

Inflation risk
Counterparty risk
Lack of diversification
Long term bond-like investment with historically low nominal yields

It's a great read for people who are withdrawing for their portfolios wanting some longevity insurance, as SPIAs can make sense as part of the solution.

Does an annuity fit your retirement goals? - Part B

10/14/2020

In last blogpost, we discussed traditional annuities. Now we will discuss Income Annuities.

Income Annuities
There are types of annuities that are expressly designed to provide a guaranteed income stream in retirement – income annuities. And although income annuities share some similarities with their traditional counterparts, they differ in important ways.

Income annuities are designed for the sole purpose of providing a guaranteed stream of income, either immediately or in the future.

An immediate income annuity typically is purchased with a single premium or “purchase payment” and requires that income payments begin within 12 months of the date your contract is issued. Income can be guaranteed for as long as you live or for a specific period of time. Because immediate income annuities guarantee a specific income amount, they offer very limited access to withdrawals, and only for some annuity options. Even if you choose an annuity option that allows withdrawals, it’s important to remember that withdrawing money from your contract can have a significant impact on the dollar value of future annuity payments.

An immediate income annuity may be worth considering if you are nearing or already in retirement; want the security of guaranteed, predictable income; and need that income to start right away. If you think you might need that money down the road and you have limited additional liquid assets, an immediate income annuity is probably not the best choice for you.

A deferred income annuity, on the other hand, is designed to provide guaranteed future income. A deferred income annuity generally permits multiple “purchase payments” over a period of time. On the annuity date you choose, all purchase payments are combined into a single, guaranteed income stream that will continue for as long as you live; some deferred income annuities offer period certain options as well. In this sense, a deferred income annuity can be used to generate a “pension-like” stream of future guaranteed income.

A deferred income annuity differs from a traditional deferred annuity in important ways. In general, a deferred income annuity:

Does not provide liquidity; there is no contract value or ability to make cash withdrawals, as there is with a traditional deferred annuity. The only time that distributions are made from a deferred income annuity contract is when annuity payments are made or a death benefit is paid.
Because there is no contract value or liquidity, and your guaranteed income is paid to you over your lifetime, longer-duration, higher- yielding assets can be used to support that guaranteed income. That’s why a deferred income annuity can guarantee a higher future income amount than a traditional deferred annuity at the time you make your purchase payment(s).

If you are considering a deferred income annuity, it’s essential to have a separate source of liquid assets set aside for emergencies. It’s also important to get the facts and speak with a financial professional.

So which annuity should you consider?
That depends on many factors.

For retirement purposes, an annuity can work in conjunction with the savings in your 401(k) plans or IRAs (both of which can be affected by market ups and downs). And given the way life spans are stretching, there’s also a chance you may outlive your savings.

An annuity can also work to supplement other sources of retirement income that are guaranteed, like a defined benefit pension plan or Social Security.

With any annuity, it’s important to get the facts before making your decision. Retirement is your reward for decades of hard work—and part of that work is making sure you’ll have enough money for the kind of retirement you want. If you are looking for an additional source of predictable income now or in the future or a product that is designed to help you accumulate assets on a tax-deferred basis, annuities may be an option worth exploring.

Does an annuity fit your retirement goals? - Part A

10/13/2020

Retirement income can come from a number of financial sources; some guaranteed, some not. Annuities are an option for people who want to bulk up the guaranteed income portion of their retirement portfolio.

Generally, an annuity works like this: You purchase the annuity, either in a lump sum or a series of payments. In return, the annuity will make payments to you at a future date or series of dates.

Annuities come in many different “flavors” – each of which is designed to help you achieve specific financial goals. They can work to build retirement savings, supplement other forms of retirement funding, or both.

The different varieties of annuities can also be bewildering. Depending on individual circumstances, many people turn to a financial professional to help them navigate the choices.

Traditional deferred annuities
“Traditional” deferred annuities are the kinds of annuities with which most people are familiar. They are designed to help you accumulate assets on a tax-deferred basis as you save for long-term goals like retirement. Let’s look at two basic examples of traditional deferred annuities: “fixed” and “variable”.

Deferred fixed annuities are “fixed” because they offer fixed interest rates. They are “deferred” because they require a waiting period before annuity payments can begin. During the deferral period, money in your contract is credited with a fixed rate of interest and grows at a steady pace.

Because you don’t pay current income taxes on the earnings in your contract until you withdraw it, more of your money remains available to benefit from that steady growth. Fixed deferred annuities also offer annuity income options that can provide guaranteed income for life or a certain period of time (like 10 or 20 years). This type of annuity typically includes a withdrawal provision that allows you to access the money in your contract. It’s important to understand, however, that withdrawals may be subject to surrender charges, income tax, and even tax penalties.

A fixed deferred annuity may be worth considering if you are looking for a conservative way to grow a portion of your assets and avoid market volatility. It may not be the best choice if you prefer greater growth potential (and don’t mind taking on the risk that goes with it) or if you need income that starts right away.

Variable deferred annuities – Unlike fixed annuities, variable annuities are built to provide financial market exposure. Variable annuities generally offer a broad range of investment options – from more conservative fixed accounts to riskier growth options. Like a fixed deferred annuity, the money in a variable annuity also benefits from tax deferral. You don’t pay current taxes on earnings in your contract until you withdraw them – which means more of your money remains available to benefit from potential growth. A variable annuity also offers a variety of options when it comes to receiving income – including lifetime income options.

Of course, greater growth potential involves more risk. A variable annuity can increase or decrease in value, depending on how financial markets perform. When considering a variable annuity, it’s essential to understand how the annuity works, including associated fees and expenses as well as the surrender charges, income tax and tax penalties that typically apply to deferred annuities. Just as important, you should have a clear sense of your financial goals and tolerance for risk. A financial professional can help you make an informed decision on whether a variable annuity is right for you.

In next blogpost, we will discuss Income Annuities.

3 Residual Choices for Income Protection Product

9/18/2020

Everyone needs residual income protection. If you can work only part time, you will still need your full-time incomes.

This article below from Standard highlights the differences between the Basic and Enhanced Residual Disability riders to help you find the appropriate rider.

Reframing the Annuity Puzzle

9/9/2020

Below is a flyer from AIG about how fixed annuities could be looked at using the consumption framework. It's a good read for anyone who is seriously thinking about retirement.

Palladium Single Premium Immediate Annuity Case Studies

7/14/2020

How to Build More Realistic Retirement Plans?

7/8/2020

You know that offering guaranteed income solutions can help complement a portfolio and instill confidence in your retirement plans. But some people, like those who plan to draw income based on returns from mutual funds and other assets in their portfolios, may not see the value guaranteed solutions offer. Unfortunately, there’s no way to predict how those investments will play out over time, especially in the face of life’s uncertainties.

When evaluating investment options, consider guaranteed options such as Protective® Guaranteed Income Indexed Annuity. This product offers three guarantees to help people strengthen their retirement portfolios with predictable income they can count on.

Below is a Protective flyer for its agents to use, if you are interested in this product, you can contact us here.

Why A Parent-Child Joint Ownership Of Annuity Will Only Hurt You

4/9/2020

In last blogpost, we discussed the difference for a spouse to be an annuity's joint owner or beneficiary. Now we will analyze the issue, also show you why a parent-child joint ownership of annuity also hurts you -

Joint Ownership Issues
As stated before, required minimum distributions must begin at the death of any owner which means that when the first joint owner dies, the annuity must begin making distributions. The only exception is if the surviving spouse was named beneficiary, they could continue the annuity without current distributions. There is no real benefit to joint ownership as it does not extend the life of the annuity and it can be a detriment to continuing the annuity when the first owner dies.

Many individuals believe that since they own their other property jointly, they should also own their annuity jointly. The better way to go would be to have each spouse name their spouse the beneficiary rather than making both spouses co-owners. Naming the spouse as beneficiary would allow a better tax outcome.

Parent-Child Joint Ownership
If a parent purchases a joint annuity with their child, the parent and child will own equal shares. A withdrawal requires two signatures and distributions are made out to both parent and child. If the parent paid the premium, they have just made a gift to their child of half the value of the annuity. If the parent wants to make a withdrawal, one half the distribution will be taxable to the child regardless of who receives the money. If the child is under age 59 ½ then the entire amount distributed is subject to a 10% penalty.

If the parent owns the annuity jointly with a child or grandchild, making the child the co-owner makes no real difference in postponing distributions. If the child dies before the parent, the parent would be forced to begin liquidating the annuity even if they had supplied the money.

The Bottom Line
In most cases, using joint ownership only hurts the ability to sustain tax-deferred growth. Most owners think joint ownership will allow the annuity to continue until the second death and that they will obtain additional tax-deferred growth. In actuality, it is just the opposite. When the first owner dies it can trigger the required minimum distributions.

Why A Joint Ownership Of Annuity Will Only Hurt You

4/8/2020

Q. What is the joint ownership issue with an annuity?

A. Annuities provide excellent investment vehicles and tax-deferred growth. If you take two investment accounts with the same assets and one is taxable and one is tax-deferred, the tax-deferred account will always do better because it is not paying taxes until the money is distributed from the vehicle.

Annuities are treated similarly to IRAs and qualified plans. The additional advantage of a non-qualified deferred annuity is that unlike a qualified plan or an IRA, no required minimum distributions need to be made during the life of the owner. Once the owner dies, the annuity must begin making post-death distributions to the beneficiary.

Under IRC Section 72(s), upon the death of any owner, the annuity must begin to make post-death distributions to the beneficiary. The Tax Reform Act of 1986 changed the joint ownership of annuity taxation rules to prevent using joint ownership to avoid taxation of the annuity over two lives. This makes annuities distributable whenever one of the owners dies. However, if the other spouse is named as beneficiary, the taxation would then be postponed.

When a surviving spouse is named the beneficiary of the non-qualified annuity, they may continue the annuity in their name. This is very similar to a spousal IRA rollover allowing the surviving spouse to continue to receive tax-deferred growth. If one spouse is the owner but names their spouse as the beneficiary, then the spouse who is named beneficiary can continue the annuity and continue to receive tax-deferred growth in the annuity.

In next blogpost, we will analyze why a joint parent-child ownership also hurts you..

3 Myths About Annuities

3/23/2020

MYTH 1: Consumers hate annuities
Truth: Although some people may not fully know the benefits of annuities, or hold outdated, incorrect opinions, a growing number are becoming educated and are choosing to add fixed indexed annuities (FIAs) to their retirement plans. In fact, recent annuity sales are shattering previous records. According to the LIMRA Secure Retirement Institute, FIA sales were $20 billion in the second quarter of 2019, 14 percent higher than prior year results. Indexed annuity sales are expected to grow by double digits to about $96 billion by the end of 2023, a 38 percent gain over 2018. Those who understand the benefits FIAs can provide — income protection and stability with little or no maintenance — are not surprised.

MYTH 2: Annuities are not an accumulation vehicle
Truth: With the innovation of uncapped crediting strategies, this is no longer true. Consumers can take advantage of a positive index performance without worrying about another 2008. An indexed annuity with a decent participation rate will help significantly reduce clients’ risk, but also give holders the growth they need. In fact, according to a study on traditional asset allocation conducted by Roger Ibbotson and Zebra Capital Management, FIAs help control financial market risk, mitigate longevity risk, and will likely outperform bonds over time.

MYTH 3: Annuities are unnecessary with proper asset allocation
Truth: The Ibbotson and Zebra Capital Management study also showed that “a major advantage of an FIA is the ability of the insurance provider to ‘transform’ equity returns into a more ‘tailored’ return/risk profile (eliminating downside risk and providing an opportunity for interest earnings based upon a portion of equity returns). This downside protection is very powerful and attractive to many individuals planning for retirement. Additionally, with today’s low interest rate environment coupled with experts’ modest expectations for bond returns in the near-term, FIAs should be considered.

7 Reasons to Consider Index Annuities

3/12/2020

If you are concerned about low interest rate and long life expectancy, index annuity could be a solution, see 7 reasons cited by AIG for its Power Index 7 product below -

Please contact us if you are interested in annuity products.

The Power of Zero - Fixed Indexed Annuity From Lincoln National

3/4/2020

As you approach retirement, you want to protect your savings from market losses.

A Lincoln fixed indexed annuity offers the potential for growth beyond that of a traditional fixed annuity, since the indexed accounts have earnings tied to the performance of an outside index. When the index increases over the indexed term, the account will be credited with earnings determined by that account’s crediting method.

But what happens if the index performs poorly and has a negative return?

The “power of zero” gives the client protection – the indexed account will never decrease due to negative performance…the lowest return is 0%.

QLAC 101 - Which Carriers Have the Best QLACs?

2/7/2020

In our last blogpost, we discussed factors to consider when purchasing QLAC. Now the question - which carriers have the best QLAC products?

We recommend products from AIG, Lincoln, and Principal.

Below is up-to-date information about AIG's QLAC product, including producer and consumer guides, sales ideas, fact sheets, and more. If you are interested in the other carriers' QLAC products, please contact us.

QLAC 101 - Factors to Consider Before Purchasing QLAC

2/6/2020

In our previous blogposts, we discussed what is QLAC and showed an example of QLAC. Now we will discuss what factors to consider before purchasing QLAC.

The decision to purchase a QLAC is a personal one and should take into account your family's needs and financial goals. For instance, you may not want to take RMDs on the entire pretax balance of your IRA if doing so would provide you with more income than you need. But will your financial standing be as strong 20 or even 10 years from now? A QLAC would allow you to enjoy your earlier retirement years knowing that you have guaranteed income in place when you really might need it.

Specifically, the following QLAC related decisions should be considers.

Single or joint life?
If you are married, you can choose a joint contract, which will provide income payments that will continue for as long as one of you is alive. Choosing a joint contract may decrease your income payments—compared with a single life contract—but may also provide needed income for your spouse should you die first.

Include a cash refund death benefit?
When purchasing a QLAC, the income lasts for your lifetime (joint contracts pay income for you and your spouse, as long as one of you is alive). You may also want to consider adding a cash refund death benefit. This provides for a lump sum paid to your beneficiaries if your lifetime payments do not exceed the dollar amount you invested in the QLAC. While a contract without the cash refund death benefit may provide higher income payments, it does not include beneficiary protection for your heirs.

When to start income?
A QLAC should be part of a broader income plan, to help ensure that your essential expenses like food, health care, and housing are covered during retirement—ideally with lifetime income sources such as Social Security, a pension, or lifetime annuities. Deciding on an income start date will depend on how this income stream will best fit into your overall plan. Here are some hypothetical examples of how someone might choose an income start date:

A 70-year-old retiree with an existing income stream that will stop at age 75 (for example, proceeds end from the sale of a business, the retiree stops working part time, inheritance income ceases) might start income at age 76 for the QLAC to replace the income that is ending.
A couple in their late 60s might like to include an income stream that begins at age 80 or 85 as part of their overall plan, to help cover higher anticipated health costs later in retirement.
A couple at age 65 might be comfortable taking withdrawals from their investment portfolio to cover their expenses at the beginning of their retirement, but they are concerned about the potential need for it to last 30 years or more. They might consider a QLAC that provides lifetime income starting at age 85 to help address these concerns.

Need to change the income start date?
For contracts that include a cash refund death benefit, you typically have the ability to change the income date by up to 5 years in either direction (subject to an age-85 maximum). For example, if you initially select age 78 as your income start date, you could subsequently change this date to any time from age 73 to age 83. Of course, the amount of income that you will receive will typically be adjusted to a lower amount if you decide to change the date to an earlier age, and a higher amount if you change the date to a later age.

In our next blogpost, we will show you some of the best QLAC providers.

QLAC 101 - How to Use QLAC?

2/5/2020

In our last blogpost, we discussed what is QLAC, now we will show how to use QLAC to create steady later in life income streams.

Let's say you own one or more traditional IRAs with a total balance of $200,000 as of December 31 of the previous year. You would be limited to using $50,000, which is 25% of $200,000 and is less than $135,000, to fund the QLAC. But if your total IRA balance is worth $540,000 or more, the maximum you can contribute to a QLAC is $135,000. Keep in mind that in both cases the money that remains in your IRA or 401(k) is still subject to RMDs.

An Example
Let's assume a woman is approaching age 70½ and does not need her full RMD to cover current expenses. By investing a portion of her traditional IRA assets in a QLAC at age 70, she would not have to take RMDs on the assets invested in the QLAC, and she would receive guaranteed lifetime income starting at a date of her choice, up to age 85.

During the deferral period, she would rely on Social Security, RMDs from the remaining money in her IRA, withdrawals from investments, and other income, such as part-time work or a sale of a business, to cover expenses. If she invests the $135,000 in a QLAC and defers to age 80, her guaranteed income would be $15,200 a year no matter what happens over time, and she would receive a total of $228,000 in payments if she lived to age 95—or more if she lived longer.

In our next blogpost, we will discuss what factors to consider if you should purchase QLAC or not.

QLAC 101 - What Is QLAC?

2/4/2020

Q. What is QLAC?

A. A QLAC is a Deferred Income Annuity (DIA) that can be funded only with assets from a traditional IRA or an eligible employer-sponsored qualified plan such as a 401(k), 403(b), or governmental 457(b).

The US Treasury Department issued a rule creating Qualified Longevity Annuity Contracts (QLACs) in 2014. QLACs allow you to use a portion of your balance in qualified accounts—like a traditional IRA or 401(k)—to purchase a deferred income annuity3 (DIA) and not have that money be subject to RMDs starting at age 72.

At the time of purchase, you can select an income start date up to age 85, and the amount you invest in a QLAC is removed from future RMD calculations. QLACs address one of the biggest concerns among individuals in retirement: making sure they don't outlive their savings.

Why Purchase QLAC?
There are two main reasons.

First, you can delay required minimum distributions (RMDs) on the money in your QLAC. Without a QLAC, you would be forced to start taking distributions based on the total value of that retirement account at age 72 (formerly 70 ½) - and paying income tax on those distributions. Many people don’t need distributions at that age, and don’t want to pay tax on that money yet. With a QLAC, you won’t have any RMDs on premiums paid until age 85.

Second, longevity. If you are worried about outliving your funds, a QLAC solves the problem. It provides guaranteed monthly income as long as you live. Plus, you get the amount you were promised at purchase, no matter what’s happened to the stock market or interest rate in the interim. You're effectively transferring that risk to the insurer.

In our next blogpost, we will show you a few QLAC examples about how it works.

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