In all of my conversations with investors/savers when the word annuity comes up they look like someone just stuck a lemon in their mouth and held it shut. When the sour look clears and they are able to speak, the first words uttered are… “I hate annuities!” To which my response is, “Then, you don’t want to defer taxes on the growth of your money?” The reply is, “NO! I love tax-deferred benefits, but I just hate annuities.” Therein lays the challenge…
If you’ve have had the opportunity to sit down with a representative of an annuity company (alias ‘Agent’) and discuss how you can benefit from an annuity product you probably felt like a 4th grader in an AP Calculus class. Maybe you signed the 50 page contract as your eyes rolled back in your head, and now own an annuity you don’t understand (or may ever… even after reading the contract). Better yet, you agreed to revisit this later (in another life) when you’ve done your homework, (oh yeah, the dog ate it) or never. Either way, most people have a bad taste in their mouths about annuities, but thankfully the annuity world is changing for the betterment of the consumer!
Until recently the majority of annuity contracts sold were the most complex annuity strategies to understand; the variable annuity and the indexed annuity. Both had more moving parts and were more intertwined than the engine in a new BMW sports car. Not to mention, most agents were able to buy that BMW after selling those annuity contracts. But, that is another story. Our focus is to find the simple version of what works for you with the least fees and the least moving parts. It would be one that would resemble a straight line six cylinder engine in a 1964 Chevrolet Nova. You remember, the one where you could see the ground on either side of the engine and you actually knew where the spark plugs were.
On July 1, 2015 the new QLAC ruling changed complex to simple as it introduced QLAC (Qualified Longevity Annuity Contract) to the annuity world. It comes with low commissions, an easy to understand contract, and no annual fee, and a guaranteed income you cannot outlive. QLAC, along with other longevity annuities called DIAs (Deferred Income Annuities), may have a huge impact on how consumers’ feel about annuities in the future. They may actually be able to say… “I like deferred income annuities and the simple benefits they provide!” I know that may take some time, but at least it is possible.
As longevity annuity products like QLAC (Qualified Longevity Annuity Contracts) and DIAs (Deferred Income Annuities) become popular it will be easier for the consumer to buy these products directly through the annuity companies without the need of an agent. This direct sales model will also save the annuity companies compliance nightmares dealing with annuity agents, and give the consumer the ability to understand and purchase the right product at the right time.
Let’s look at the future of the QLAC. As more and more of us accumulate wealth and find ways to defer paying taxes on our money through IRAs, 401ks, etc., we also realize that we could be in a tailspin when we turn 70 ½ and it’s mandatory that we take our required distributions from these investments. If we don’t need the money at 70 ½ not only will we be paying taxes on it, but we also may be pushed into a higher tax bracket and have the pleasure of paying even more taxes, not to mention the potential impact of making our Social Security benefits taxable.
Here, is where QLAC helps. Individuals are allowed to take $125,000 or 25% of their traditional IRA or qualified money (whichever is lower) and put the money into a QLAC which defers the required distribution up to age 85. That is up to an additional 15 years of tax-deferral. Granted, the amount you can defer isn’t as much as some would like it to be, but the future may bring change as retirees push the government for increased amounts. If you are still employed and have a 401k or other qualified plan that is in the QLAC ruling you will most likely learn from your employer that QLAC will be added to the defined contribution plan at some time in the future. If your employer isn’t aware of the tax benefits of a QLAC be the first to introduce it to your qualified plan manager.
Refer back to our website QLAC.direct for all the information you will need to understand how a QLAC could benefit you.