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IRS Issues New Rules for IRA Annuities

While IRAs have become a common and popular tool for retirement, they can sometimes be inflexible when it comes to the timing and taxation of retirement benefits. 

For clients who plan to keep working beyond age 70 ½ (when distributions need to commence), the taxation of the IRA distributions can be onerous.  For clients with a family history of longevity, there can be concerns about outliving the IRA benefits.

The IRS recently issued new rules concerning an annuity product that addresses these two concerns – the Qualified Longevity Annuity Contract (QLAC). 

IRA funds invested in a QLAC are excluded from the calculation of the annual required minimum distribution (RMD) that begins once an IRA owner reaches age 70 ½.  Instead, QLACs are allowed to defer distributions until age 85. 

There are two important rules to follow if purchasing a QLAC inside an IRA:

First, there is a dollar limit on how much can be invested to purchase a QLAC.  For contracts purchased on or after July 2, 2014, IRA owners can use up to the lesser of (1) 25% of their account balance, or (2) $125,000.  The latter dollar amount will be anually adjusted for future cost-of-living increases.  The $125,000 limit will be in effect for all of 2015.

Second, a QLAC may be issued by adding a rider or endorsement to an existing contract.  The rider or endorsement must expressly state that the contract is now intended to be a QLAC.  The dollar limits shown above must also be considered.

Due to their limitations, QLACs will likely not become a cure-all for IRA owners.  It will, however, become a viable planning tool as part of a retirement plan to address key issues and provided additonal flexibility.

Call us today to discuss your specific situation and to start planning for your and your family's future!

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