QLACs mark first year in traditional IRAs
July 1, 2014 was a seminal moment for the annuity industry and the day when qualified longevity annuity contracts, QLACs, were approved for use in traditional IRAs and participating employer qualified plans. This ruling was a true annuity game-changer.
It has been a year since the ruling, and the QLAC train is moving slowly but definitely gaining momentum as people start learning of its simplistic design and unique value propositions. Currently less than 10 carriers are offering QLACs, and the strategy is now being added to 401(k) type platforms as well.
QLACs now represent less than 1% of all annuities sold annually, but my prediction is that this new strategy will be the dominant annuity product within the next five years. QLACs aren’t perfect, and no annuity is too good to be true, but this strategy will influence how all annuities are bought, sold, and analyzed in the future. Let’s look at the reasons why.
QLAC limitations are actually a positive
When “longevity annuities” were chosen to be the delivery structure for the QLAC idea, the genius behind that one product strategy was implemented for a reason. Yes, the government got this one right by not allowing QLAC status to the overhyped and oversold indexed and variable annuity products. Only longevity annuities were given the governmental blessing. Thank goodness.
The premium limitations for buying a QLAC is the lesser of $130,000 or 25% of your total IRA (non-Roth) assets. It is a good thing that you cannot over fund this annuity because this is a common buying mistake, and this dollar limit serves as an effective asset allocation tool in my opinion.
QLACs have no liquidity, and the only way to get to your money is through a lifetime income stream. This is also a good thing because the ruling was put in place for you to truly plan for a future income stream, and not to change your mind. QLACs should work in conjunction with your Social Security payments and a pension (if so fortunate).
No accumulation value
It’s important to remember that annuities aren’t investments. They are contractually guaranteed transfer of risk products, even though that’s not how most annuities are pitched and hyped by agents. QLACs have no accumulation value because there is no investment component. There are no fees, and no moving parts. It is a future pension plan for all practical purposes.
QLAC benefits are one of a kind
Of all annuity types available, only the QLAC can offer both a future lifetime income stream along with the potential to lower your required minimum distribution, RMD, taxes. That is a powerful and unique combination that sets the QLAC strategy apart.
Lower RMD taxes
Whether you like it or not, if you have a traditional IRA, when you turn age 70 ½ you will have to start taking money out and pay taxes on that amount annually. Think of it as the IRS gently tapping you on the shoulder.
The dollar amount you have in a QLAC isn’t used as part of your RMD calculation. For example, if you have a $500,000 traditional IRA, then you could own a $130,000 QLAC. Your RMDs would then be based on $370,000, which would effectively lower your taxes.
Joint life income
Even though one person owns a traditional IRA, you can add your spouse for joint lifetime income using a QLAC. As I remind my clients all the time, your spouse loves annuities and the contractual guarantees they provide. Don’t believe me, then just ask them.
Celebrating simplicity and buying direct
The reason that I have deemed July 1 “Annuity Independence Day” is because the qualified longevity annuity contract is the product that will transform the annuity industry from the agent’s commission leading the way to product simplicity for the consumer at the forefront.
In addition, I believe that the increasing popularity of the QLAC product will also be the impetus for annuities to be sold direct to the consumers. It just makes common sense in my opinion to follow in the direct to consumer path of stocks, mutual funds, etc. Annuities are currently distributed like the old travel agency model. It’s that archaic.
So on every July 1, it’s time to celebrate annuity simplicity and transparency. It’s time to look forward to the eventual reality of being able to buy annuities direct, and without the need of that pesky agent. It’s time to thank QLACs for permanently changing the annuity industry forever. Happy Annuity Independence Day!
Originally published by MarketWatch 6.30.15 – http://www.marketwatch.com/story/qlacs-mark-first-year-in-traditional-iras-2015-06-30