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Wednesday, February 15, 2012

IRS Proposes Regulations for Qualified Longevity Annuity Contracts

IRS released proposed regulations regarding the establishment of "qualified longevity annuity contracts" (QLACs) on Friday February 3, 2012. The new QLAC rules will allow you to purchase certain annuity contracts with a portion of your retirement assets that you will be able to exclude from your required minimum distribution (RMD) calculations.

Beware though, the proposed regulations issued by IRS are just that… PROPOSED. They are not currently effective and could be different once the final version of the regulations is issued. The good news though, is that since we are talking about proposed regulations, which do not require any Congressional action, and not proposed legislation, which would require Congressional action, there’s a pretty good chance that these new rules (or something very similar) will actually take effect.

Although they are subject to change, here are some of the highlights of the new QLAC proposed regulations:

  • You will be able to exclude the value of a QLAC from your RMD calculations, allowing you to keep a greater portion of your IRA (or other retirement account) intact longer.
  • Payments from QLACs will have to begin no later than the first day of the month after you turn 85.
  • You will be limited as to how much of your retirement savings you can invest in a QLAC. The limit will be the lesser of $100,000 or 25% of your applicable retirement account assets. The 25% limit will apply on an individual plan basis, except for IRAs, BUT the $100,000 is a cumulative limit for all QLACs in all retirement accounts. For IRAs, the 25% limit will apply to the prior year-end total of all IRAs (not including Roth IRAs).
  • The limits will apply separately to each spouse when each spouse has their own retirement accounts. 
  • QLACs will not be able to be variable or equity-indexed annuity contracts.
  • QLACs will not be able to offer any cash surrender value.
The only death benefit that can be made available to a beneficiary of a QLAC will be a life annuity (income stream for life). The size of the payments and when they must begin will vary depending on whether the beneficiary is a spouse or non-spouse designated beneficiary.

It looks like IRS is targeting a January 1, 2013 date for making these regulations effective, so there’s a good chance the final version of these rules will be released sometime later this year. Stay tuned!

By Jeffrey Levine and Jared Trexler
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*Copyright 2011 Ed Slott and Company, LLC



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Q I am 70-1/2 this year and still working and contributing to my 401(k). I plan to retire this year. I also want my wife (not earning an income) to take out a Roth IRA this year. I am wondering how much I have to earn pre-retirement for my wife and I to take out Roth IRAs? Or I guess better said, does my contribution to my 401(k) need to be deducted from my earnings amount before figuring if I have enough left for Roth contributions? If I do not have enough earnings for my wife and I before I retire, can I just do the spousal Roth IRA for my wife without doing a Roth contribution for myself?