Dear Rick:
I am 67 years old and I just retired a few months ago. I have been divorced twice, and I just got done paying off my wife from my second marriage, and I no longer have any obligations to her or to anyone else. Financially, I’m in very good shape. I have a pension and Social Security that more than covers all my needs. In fact, I am saving about $500 every month. My question deals with my IRA. When I retired I rolled over my 401(k) into my IRA and I have a little over $600,000. I know in a few years I’ll have to begin taking distributions even though I really don’t need the money. I was talking to some friends of mine and one of them told me about an annuity that you could put money into and that it will delay your required minimum distribution. I talked to someone who sells annuities, and he said that there are no annuities that allow you to defer your taxes past 70½. He recommended an equity-index annuity that he thought would be much better for me. I’m not sure I trust him, so I thought I’d write you for a second opinion. My first question is, is there a type of annuity that I can defer my required distribution at 70½, and do you think it makes sense in my situation?

Thank you.
D.R.

Dear D.R.:
The type of an annuity you’re talking about is what is known as a qualified longevity annuity contract (QLAC). These annuities are relatively new and only came into existence about four years ago. What makes these deferred income annuities unique is that you are not taxed when you move money from your IRA into this annuity and the money that you put into this special annuity is not included in your required minimum distribution calculation. The benefit is that you do not have to take a distribution from this annuity until your mid-80s. It is only when you begin taking distributions that you are taxed on the money. Therefore, it is a way of deferring the taxes on the money beyond 70½.

A QLAC annuity operates similarly to a pension. When you buy the annuity you can select when you begin your distributions. Once you begin taking a distribution those distributions continue for the rest of your life. Therefore, if for example you choose to invest in a QLAC and have your distributions begin at 80 years of age, your distribution will be substantially higher than if you began at 71. Because these are annuities for life, if you select to begin your distribution in your 80s, you do run the away before you begin collecting. In those situations, there are options within the QLAC contract, that if you did pass before you begin collecting, your premium could be passed on to your beneficiary. In these types of annuities there are very few options you can select; however, you can select a joint-survivor annuity which means the benefits upon your death would continue to your spouse, or you can select the return-a-premium option that would pay a death benefit to your beneficiaries. Of course, if you select any one of the aforementioned options, it would substantially reduce your yearly distributions from the annuity.

QLAC annuities are not for everyone and they have their limitations. First, the maximum you could put into a QLAC annuity is the lesser of 25 percent of the value of your IRA or $130,000. In addition, once you invest in one of these annuities it is irrevocable. Therefore, it is important to weigh the pros and cons before you buy one. Obviously, one of the pros is the fact that you will get a distribution for the rest of your life, while at the same time, one of the downsides is once you invest in a QLAC you lose control of that money.

One last note about QLACs and that is it is important to shop around. You would be surprised how much the deals differ between companies. Therefore, by shopping around you may find that your yearly distribution is more from one company than another.

In reviewing the case at hand, my advice would be that I would not do it. After all, two of your income sources are already income for life, your pension and Social Security. I feel that there is no reason to lock up the remaining money. After all, once you do a QLAC you lose control of your principal. I’m always a big believer that it is important to have flexibility because we never know what the future is going to bring. Therefore, since your income needs are covered by pension and Social Security, there really is no need to tie up any additional money.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.