WHY QLACs MAY NOT MATTER
WHY QLACs MAY NOT MATTER
BY
DUSTIN LEONARD, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
JEFF QUICK, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
ROB ROMESBURG, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
GRADIENT
INSURANCE BROKERAGE, INC.
WHY QLACs MAY NOT MATTER
BY
DUSTIN LEONARD, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
JEFF QUICK, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
ROB ROMESBURG, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
You may have recently seen the barrage of articles about Qualified Longevity Annuity Contracts, or QLACs. The headlines scream, “You don’t need to take RMDs.” But behind the headlines, the details may temper your client’s enthusiasm.
What is a QLAC? On July 1, 2014, the Treasury Department issued final rules regarding the establishment of “Qualified Longevity Annuity Contracts” or (QLAC). The proposal is designed to address current concerns regarding retirees outliving their retirement nest eggs. A QLAC is an annuity contract that would be purchased through an insurance company and meet certain requirements. An individual could use assets in a qualified defined contribution plan, 403(b), or IRAs (not including Roth) to purchase a QLAC. The QLAC is designed like a traditional deferredimmediate annuity. These contracts allow the policy holder to pay in their premium, wait a number of years, and then eventually annuitize the contract over their life. If a policy holder selects the death benefit option, their contract allows a QLAC to pay benefits to their beneficiaries in the event of their death before reaching maturity. However, selecting this benefit option will reduce the amount of retirement income received if the policy holder lives to the age the income starts, 70 ½.* A deferred-immediate annuity is characterized as an immediate annuity that begins at a future date. By definition, it does not have a surrender value and is specifically designed to generate annuitization
2 | Why QLACs May Not Matter
payments. It cannot be deferred indefinitely, cash surrendered, or rolled into another product.
How much premium can someone put into a QLAC? The Treasury Department’s new rules allow participants to purchase these contracts with a certain portion of the account balances. The maximum amount of premium payable into a QLAC under a plan would be the lesser of $125,000 (adjusted for inflation) or 25% of a participant’s account balance. For IRAs, the percentage limit is based on the total of all IRAs. Roth IRAs do not count and cannot be considered for a QLAC because Roth IRA accounts are exempt from RMD rules.
What is the benefit of a QLAC? The regulations modify the Required Minimum Distribution (RMD) rules that require distributions from qualified plans to begin upon an account owner attaining age 70 ½. In many situations, those individuals who are forced to take distributions from their qualified plans do not have a need for the income and would like to avoid the taxable event associated with the withdrawal. Under the regulations, amounts designated as a QLAC would not be counted when determining RMDs. Distributions from a QLAC would be deferred until the month following the account owner’s 85th birthday, the approximate life expectancy of an individual.
Is QLAC going to significantly change retirement strategies? This is a little tougher to answer. So far, many producers are extremely interested in learning all the ins and outs of QLAC. The headline of a QLAC is attention-grabbing: “You don’t need to take RMDs!” But the details reveal that the actual benefit for many people isn’t very significant. First of all, the amount of premium that could be moved into a QLAC is pretty limited. So for those clients of yours with large qualified plans, the immediate impact may not be that great. Secondly, the QLAC guidelines do not eliminate the need to take withdrawals. Sooner or later, the withdrawals will need to begin. And like any other form of tax-deferral, it not only defers the payment of taxes, it also defers the calculation of the tax rates. This means that instead of paying taxes at today’s rates, you will be paying taxes at tomorrow’s rates. If you believed tax rates are likely to increase, then you might have been better off to pay taxes now rather than later. Finally, the tax savings may be outweighed by the comparative performance of the QLAC product itself. The regulations surrounding the QLAC do not allow a variable annuity or a fixed-index annuity to be used as the underlying product for a QLAC. This means that whatever premium is deposited would need to be in a fixed interest rate product or possibly one with a cost of living adjustment. In either event, any future growth in the product is likely to be limited. In comparison, a variable annuity is an insurance contract where the insurance company guarantees a minimum payment at the end of the accumulation stage; whereas, a fixedindex annuity is an insurance contract whose growth potential is based on a market index. And if you are still interested, there is one last important question …
Where can I get one? As of July 2014, the answer was: nowhere. When QLACs were finally released, most carriers didn’t have complying products. However, as time goes on, you can expect more carriers to design products to take advantage of these new rules.
So, what should you do? The best service you can offer your clients today is to be an informed professional who stays on top of any topic that is relevant to their retirement plans. Stovall and Associates, Ltd. specializes in not only providing tax strategy for our own elite clientele, but we have a special fondness for the individual financial services professional. Because of our background and on-going involvement in financial and retirement planning, we have worked with hundreds of producers, their clients, and their clients’ tax professional to ensure that tax issues are properly addressed within the context of a larger financial and insurance strategy.
Annuities are designed to be long-term investments. Early withdrawals may impact annuity cash values and death benefits. Taxes are payable upon withdrawal of funds. An additional 10% IRS penalty may apply to withdrawals prior to age 59 ½. Annuities are not guaranteed by FDIC or any other governmental agency. Guarantees are based on the claims paying ability of the issuing insurance company. Fixed Indexed Annuities are insurance products and not considered a security or investment. This announcement is in no way intended as a guarantee or promise. Nor are any offers or contracts being extended within this message. For financial services professional use only. Some restrictions may apply. Please call for details. Distribution of information is at the sole discretion of Gradient Insurance Brokerage, Inc. The opinions expressed here are those of the authors and do not necessarily reflect the opinions of Gradient Insurance Brokerage, Inc.
* Vernon, Steve. “This annuity has you covered if you live long.” CBS Money Watch. 21 July 2014. Web.
Why QLACs May Not Matter | 3
BY
DUSTIN LEONARD, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
JEFF QUICK, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
ROB ROMESBURG, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
GRADIENT
INSURANCE BROKERAGE, INC.
WHY QLACs MAY NOT MATTER
BY
DUSTIN LEONARD, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
JEFF QUICK, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
ROB ROMESBURG, VICE PRESIDENT OF MARKETING Gradient Insurance Brokerage, Inc.
You may have recently seen the barrage of articles about Qualified Longevity Annuity Contracts, or QLACs. The headlines scream, “You don’t need to take RMDs.” But behind the headlines, the details may temper your client’s enthusiasm.
What is a QLAC? On July 1, 2014, the Treasury Department issued final rules regarding the establishment of “Qualified Longevity Annuity Contracts” or (QLAC). The proposal is designed to address current concerns regarding retirees outliving their retirement nest eggs. A QLAC is an annuity contract that would be purchased through an insurance company and meet certain requirements. An individual could use assets in a qualified defined contribution plan, 403(b), or IRAs (not including Roth) to purchase a QLAC. The QLAC is designed like a traditional deferredimmediate annuity. These contracts allow the policy holder to pay in their premium, wait a number of years, and then eventually annuitize the contract over their life. If a policy holder selects the death benefit option, their contract allows a QLAC to pay benefits to their beneficiaries in the event of their death before reaching maturity. However, selecting this benefit option will reduce the amount of retirement income received if the policy holder lives to the age the income starts, 70 ½.* A deferred-immediate annuity is characterized as an immediate annuity that begins at a future date. By definition, it does not have a surrender value and is specifically designed to generate annuitization
2 | Why QLACs May Not Matter
payments. It cannot be deferred indefinitely, cash surrendered, or rolled into another product.
How much premium can someone put into a QLAC? The Treasury Department’s new rules allow participants to purchase these contracts with a certain portion of the account balances. The maximum amount of premium payable into a QLAC under a plan would be the lesser of $125,000 (adjusted for inflation) or 25% of a participant’s account balance. For IRAs, the percentage limit is based on the total of all IRAs. Roth IRAs do not count and cannot be considered for a QLAC because Roth IRA accounts are exempt from RMD rules.
What is the benefit of a QLAC? The regulations modify the Required Minimum Distribution (RMD) rules that require distributions from qualified plans to begin upon an account owner attaining age 70 ½. In many situations, those individuals who are forced to take distributions from their qualified plans do not have a need for the income and would like to avoid the taxable event associated with the withdrawal. Under the regulations, amounts designated as a QLAC would not be counted when determining RMDs. Distributions from a QLAC would be deferred until the month following the account owner’s 85th birthday, the approximate life expectancy of an individual.
Is QLAC going to significantly change retirement strategies? This is a little tougher to answer. So far, many producers are extremely interested in learning all the ins and outs of QLAC. The headline of a QLAC is attention-grabbing: “You don’t need to take RMDs!” But the details reveal that the actual benefit for many people isn’t very significant. First of all, the amount of premium that could be moved into a QLAC is pretty limited. So for those clients of yours with large qualified plans, the immediate impact may not be that great. Secondly, the QLAC guidelines do not eliminate the need to take withdrawals. Sooner or later, the withdrawals will need to begin. And like any other form of tax-deferral, it not only defers the payment of taxes, it also defers the calculation of the tax rates. This means that instead of paying taxes at today’s rates, you will be paying taxes at tomorrow’s rates. If you believed tax rates are likely to increase, then you might have been better off to pay taxes now rather than later. Finally, the tax savings may be outweighed by the comparative performance of the QLAC product itself. The regulations surrounding the QLAC do not allow a variable annuity or a fixed-index annuity to be used as the underlying product for a QLAC. This means that whatever premium is deposited would need to be in a fixed interest rate product or possibly one with a cost of living adjustment. In either event, any future growth in the product is likely to be limited. In comparison, a variable annuity is an insurance contract where the insurance company guarantees a minimum payment at the end of the accumulation stage; whereas, a fixedindex annuity is an insurance contract whose growth potential is based on a market index. And if you are still interested, there is one last important question …
Where can I get one? As of July 2014, the answer was: nowhere. When QLACs were finally released, most carriers didn’t have complying products. However, as time goes on, you can expect more carriers to design products to take advantage of these new rules.
So, what should you do? The best service you can offer your clients today is to be an informed professional who stays on top of any topic that is relevant to their retirement plans. Stovall and Associates, Ltd. specializes in not only providing tax strategy for our own elite clientele, but we have a special fondness for the individual financial services professional. Because of our background and on-going involvement in financial and retirement planning, we have worked with hundreds of producers, their clients, and their clients’ tax professional to ensure that tax issues are properly addressed within the context of a larger financial and insurance strategy.
Annuities are designed to be long-term investments. Early withdrawals may impact annuity cash values and death benefits. Taxes are payable upon withdrawal of funds. An additional 10% IRS penalty may apply to withdrawals prior to age 59 ½. Annuities are not guaranteed by FDIC or any other governmental agency. Guarantees are based on the claims paying ability of the issuing insurance company. Fixed Indexed Annuities are insurance products and not considered a security or investment. This announcement is in no way intended as a guarantee or promise. Nor are any offers or contracts being extended within this message. For financial services professional use only. Some restrictions may apply. Please call for details. Distribution of information is at the sole discretion of Gradient Insurance Brokerage, Inc. The opinions expressed here are those of the authors and do not necessarily reflect the opinions of Gradient Insurance Brokerage, Inc.
* Vernon, Steve. “This annuity has you covered if you live long.” CBS Money Watch. 21 July 2014. Web.
Why QLACs May Not Matter | 3
