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Wealth management is more than just investment advice – it includes all aspects of a client’s financial life.

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At Virtus Wealth Management, we believe we can help you no matter what age you are, what life stage you are in, or how much money you are working with. We want you to feel educated, empowered, and involved in the planning of your financial future.

Qualified Longevity Annuity Contracts: A New Breed of Annuity

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  • Qualified Longevity Annuity Contracts: A New Breed of Annuity

by | Mar 3, 2016

When an investor turn 70 ½ years old, the Federal Government demands that they begin taking distributions from their Qualified Retirement accounts so that the IRS can begin collecting taxes on all that pretax money you have been holding onto for so long. These distributions are referred to as Required Minimum Distributions or RMD’s. In many situations you do not need the money to live off of at that time, so you take the money out, pay taxes on it and put it in a Non-Retirement account (essentially taking money out of your right pocket, putting it in your left pocket, and paying the government in between). For example, the first year RMD on a $500,000 Qualified Retirement account would be $18,248. This amount is calculated based on your total year end value of Qualified Retirement accounts divided by life expectancy (based on IRS mortality tables). This unneeded extra income can potentially inflate your tax liability and even push you into a higher tax bracket altogether. It could also increase the percentage of taxes you have to pay on your Social Security Benefits. In 2015 if you are Married Filing Jointly, 85% of your Social Security Benefits are taxable if your combined income is over $44,000. However, as of July 2014, there is a solution to lower the immediate tax liability of Required Minimum Distributions for an individual who does not have immediate income needs.

Qualified Longevity Annuity Contracts (QLACs) are a new breed of a Deferred Income Annuity in which you invest a lump sum premium with an insurance company, then on a future date (which you specify) you receive a guaranteed monthly payout amount for the rest of your life (or a specified number of years if you so choose).   Before entering into a contact with the insurance company you will know exactly how much you pay and exactly how much they will pay out on your specified date. This is not a new concept, Deferred Income Annuities have been around for years; however, the ability to purchase them within an IRA and remove that amount from your RMD calculations is new. The maximum QLAC purchase is the lesser of $125,000 or 25% of your qualified retirement total balance. You can defer the income received for up to 15 years and must begin distributions by age 85.

For example, say you are a 70 year old male with $500,000 in Qualified Retirement Accounts at year end. As mentioned above, the first year RMD for this individual would be $18,248 that you have to transfer out of your IRA and pay taxes at your marginal tax rate as if it were normal income. If your investments grow at 7% per year, your RMD at age 84 will be $44,168. This is a lot of income to be taking year after year if you do not need the money.

If implementing a QLAC, this same 70 year old male investor could move up to $125,000 of his qualified retirement balance to a QLAC for 15 years and then receive $26,850 per year ($2,237 per month) for 10 years guaranteed* (This is an estimate based off of information entered on the following website on November 20, 2015, , actual rates are determined by an issuing insurance company). This would change his first year RMD calculation to be based on a $375,000 qualified retirement account balance and result in a first year RMD of $13,686. You have effectively removed $4,562 from your RMD resulting in a yearly tax savings of $1,140 (assuming a 25% marginal tax bracket). This would continue for up to 15 years and eventually result in a total estimated tax savings of $27,906 over that time period if maintaining a 25% tax bracket. Remember, this is deferring your taxes not eliminating them. In that next year once your QLAC annuitizes you would begin receiving your agreed upon monthly distribution of $2,237 and continue to take your RMD, all of which is taxable income.

The downside of this strategy is the potential lost earnings that $125,000 could have earned if it stayed in your retirement account. The extent of those potential earning would depend on market performance over that time period and an investor’s risk tolerance and asset allocation. But for someone who wants to: reduce their taxes, decrease RMDs, plan future income, and prevent savings from market downturns a Qualified Longevity Annuity Contract may be a beneficial strategy for you. If you would like to learn more or see how a QLAC would affect your financial situation contact by phone or email here at Virtus Wealth Management.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized advice.

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