Be a Millionaire Next Year by Michael R. Berg

Author:Michael R. Berg
Language: eng
Format: epub
Tags: BUS050000 Business & Economics / Personal Finance / General
Publisher: Humanix Books

Retirement Tax Strategy 2: Consider a “Qualified Longevity Annuity Contract”

The government realizes you may have a lot of money in your IRA. It also knows the country is facing an oncoming burden of millions of poverty-level retired Americans.

To get ahead of the problem, Congress has devised a simple tax loophole anyone can use to create a lifetime of income and avoid the tax bite on his or her IRA accounts—it’s called the qualified longevity annuity contract, or QLAC.

Simply put, it’s a single-premium annuity. You buy it once and set a date down the road to take the income. The more you put in and the longer you defer the income, the more you will earn.

The limitation is that you cannot put more than 25 percent of your IRA savings (up to $125,000) into a QLAC. So if you have $500,000 in an IRA, you can neatly avoid taxes on a quarter of that money by purchasing a QLAC up to the current limit, according to financial advisers.

If you have less, well, then you have less to invest. But consider this: Under current conditions, it takes just $25,000 to create $1,000 a month of tax-free income 20 years down the line. Invest $50,000 and that’s $2,000 a month, and so on, advisers say.

That $25,000 will compound over two decades into perhaps $100,000—then the income begins as the balance continues to compound. Importantly, in a QLAC the income stream is tax-free and is no longer subject to required minimum distributions.

You might not live to see the ultimate payout, but you also might live much longer than you had planned and need that income to pay for health care later in life. Since an annuity is an insurance product, it pays you until death, regardless.

Besides longevity, interest rates matter. In a rising rate environment, you might want to wait for rates to normalize before taking the leap on a QLAC. Also, remember that signing an annuity contract means you lose access to that cash. Your heirs won’t get it either. Plan carefully.

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