A new, liberating IRA option is available
By George M. Fox, Attorney
The Chutes and Ladders board game comes to mind when you’re trying to figure out how much you must take out of your IRAs, etc. at age 70½ and after. If you land here, you slide to there and take that much out. If you get here, you go down the chute to there and take something else.
But now there’s a ladder, an opportunity to let a significant part of your IRA keep growing. And it’s courtesy of the IRS.
(FYI: 70½ is no magic number. In 1889, Chancellor Otto von Bismarck decided Germany needed a government program for people who were disabled because of age. They used age 70 as the starting point. In the U.S., age 70 first appeared in the 1996 tax act. However, nobody seems to know where the “½” came from. You can’t Google “59½ and 70½” and find out anything more than probably, some IRS employee just popped in the fractions one day.)
Anyway, here’s the new ladder: You can deflect a chunk of your IRA to as late as age 85. That chunk will not be counted when you figure out your Minimum Required Distribution (MRD). You can push the amount—and all the earnings on it—into the future.
The amount you can deflect is $125,000 or 25 percent of your retirement account balance, whichever is less.
Obviously this is a tool for those who don’t need or want the full Minimum Required Distribution. Now you have an IRS-sanctioned way to cut it back. And yes, this applies to any employer-sponsored, tax-deferring plan, including 401K’s, 403b’s, etc. (For the uninitiated: the MRD is the amount you must take out from your IRA, starting at age 70 ½ and in each year thereafter.)
Here’s an example. Let’s assume your retirement account has $800,000 in it and you’re age 70½:
If you did nothing, your Minimum Required Distribution would be $800,000 divided by IRS’ life expectancy number.
If you did this new deferral, then your Minimum Required Distribution would be $675,000 divided by IRS’ life expectancy number.
What happens to the $125,000 difference? It keeps growing tax-deferred.
Where it keeps growing tax-deferred is very important. The money you defer has to go into a special type of annuity, called a “QLAC” (which stands for “Qualified Longevity Annuity Contract.”) The amount you defer becomes the one-and-only premium.
You can defer having to tap into this annuity until age 85, or you can decide on a younger age. The QLAC can provide for a death benefit beyond the premium you put in, so you’re not going to lose that money. The amount you’ll get is guaranteed by the insurance company, too.
An IRS Bulletin gives this example: At age 70, an employee takes $100,000 from his or her IRA account to purchase a QLAC, which will pay benefits starting at age 85. This would get you an annual income between $26,000 and $42,000. Not too shabby.
You’re not stuck with age 85; and there are other options you can get in your QLAC. So it’s important that you compare the features available in different insurance companies’ QLACs.
So if you don’t need the full amount you’re required to withdraw from your IRA, have a ladder.