Friday, November 6, 2015

QLACs and RMDs: Need a Break On Your Required Minimum Distribution? Read This!

I had a number of clients hit the magic RMD age this past year. RMD is an acronym for Required Minimum Distributions, if you are getting close to 70 years of age, you will be hearing that a lot. Even if that magic number is quite a ways down the road for you, this is a post you will want to read & remember. 

Read more about RMDs in detail here on my blog post.  

For a quick recap about what Required Minimum Distributions are, the Internal Revenue Service (IRS) defines it as "Required Minimum Distributions generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired."

The idea of required minimum distributions at the age of 70 years has been in contention for sometime now. Many people these days are still working at that age and are not ready to draw from their retirement accounts. People also are living much longer due to many medical advances and sometimes outliving their retirement savings does become a matter of concern. 

In essence, a retiree must begin to take RMDs from his/ her qualified plans and IRAs by April 1st of the year after the year in which he or she turns 70 and a half in age. This requirement is postponed for qualified plans like the 401(k) if the taxpayer is still working and not a 50% or more owner of a business. The amount of the RMD is calculated on the account balances at the end of the previous year and life expectancy tables. 





Like I said earlier, since there were a few more clients than usual this year that hit 70 and half years in age, we heard the term "QLAC" thrown around a lot. "QLAC" stands for qualified longevity annuity contracts. The Internal Revenue Services (IRS) recognizing the above short-comings so to speak, approved QLACs to be included for use in Traditional IRAs, 401(k)s and other approved retirement plans in the middle of 2014. 

 Under the new rules: 
  • You can use up to 25% of your non-Roth retirement funds or $125,000, whichever is less, to fund a QLAC
  • You can defer funds from the QLAC for an additional 15 years or till you reach 85 years of age
  • You can lessen your RMDs
  • Since QLACs cannot include a variable, indexed or comparable component, they must be fixed annuities, hence your principal is protected. 
  • The QLAC is indexed for inflation
Do contact your Enrolled Agent or your financial advisor if this is an option for you and please make an informed decision regrading your retirement & your estate needs.

Bibliography: IRB 2014-30; Journal of Accountancy; CPA Practice Advisor

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com