Reduce your RMD in 2021 and beyond
People who do not need income from their IRA, SEP and / or 401 (k) benefit from this year’s waiver of Minimum Required Distributions (RMD). They reduce income taxes and preserve their plan assets.
But RMDs will return in 2021. Since retirees will be a year older than when they last took their RMDs, they will have to withdraw a slightly higher percentage from their pension plans.
There is a little known way to reduce the âRMD shockâ in 2021 and beyond. This is by placing a portion of your funds in a qualifying longevity annuity contract. A QLAC is a type of deferred income annuity designed to meet IRS requirements. Money in a QLAC is excluded from the assets on which future RMDs are calculated.
You pay a one-time premium and then choose when to start receiving lifetime income by age 85 at the latest. Deferring RMDs allows you to keep more of your pension plan intact and tax-deferred. A QLAC saves up to a quarter of the IRA for future production of guaranteed income.
Carry over up to 25% of your RMD for years
An IRA owner can place 25% of their IRA balance, up to $ 135,000, in a QLAC. For example, at age 75, $ 135,000 in a QLAC avoids $ 5,895 in taxable RMD that you would otherwise have to receive. At 84, you would avoid RMD $ 8,710.
Carrying forward up to 25% of your RMD is a great way to set aside some of your assets today, reduce RMD from age 72, and defer collecting income from those funds. This way you can get more income when you really need it in the 80s and 90s.
Although this additional income in subsequent years is fully taxable, other income may decrease or decrease at that time. Deductible medical or long-term care expenses could then offset the increase in taxable income.
Few 401 (k) plans allow QLACs. However, if your employer’s plan allows for on-the-job rollovers or if you’ve already retired from service, you can transfer money from your 401 (k) or other pension plan to an IRA. , then set up the QLAC.
Create more income for life
Delaying RMDs is not the only advantage. The biggest advantage is that you will create a bigger income stream that you cannot survive.
You don’t have to wait 72 to buy a QLAC. The earlier you buy one, the more time you’ll have to build up capital and the bigger the payout you’ll get.
Since you will have a new source of guaranteed income at your convenience, you may be comfortable taking more market risk with other assets in your plan and achieving higher returns.
Since the QLAC is a good deal for retirees who can afford to defer certain income, the IRS imposes strict limits. During your lifetime, you cannot allocate more than 25% of the total of all your IRAs or $ 135,000, whichever is less, in a QLAC. The dollar limit is periodically adjusted for inflation.
You can choose an individual or joint lifetime payment, with the latter paying income until the death of the second spouse. The joint beneficiary must be a spouse, which meets the IRS death transfer rules. There is also a cash refund option, where beneficiaries can get a lump sum payment for any initial deposit premium not yet paid upon the death of the annuitant (s).
The limit of $ 135,000 / 25% applies to each account holder. For example, John Doe has $ 600,000 in two IRAs. It can allocate up to $ 135,000 to a QLAC. His wife, Jane Doe, who has $ 350,000 in her IRA, can put up to $ 87,500 in a QLAC.
As with any deferred income annuity, you no longer control the capital of a QLAC. Your money is locked in because you have entered into an agreement with the insurer which offers you great benefits in return.
Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed rate, indexed and immediate income annuities. It offers a free quote comparison service. He launched the AnnuityAdvantage website in 1999 to help people research their best capital protected annuity options. More information, including updated interest rates from dozens of insurers, is available at https://www.annuityadvantage.com or (800) 239-0356.