How to take advantage of new rules on RMDs and qualified longevity annuities
By Ken Nuss
A retirement crisis looms. Americans aren’t saving enough, and the aging of the population may require trimming Social Security benefits eventually.
Congress recently passed the SECURE 2.0 Act to help people save more for retirement by boosting tax breaks. It builds on the original SECURE Act. Three provisions will affect the most people.
Required minimum distributions (RMDs) from traditional IRAs, SEPs, 401(k)s and other retirement accounts now must begin at age 73, up from age 72 previously.
Retirees who don’t need the income thus get an extra year for their retirement-account money to grow without taxes. Just one more year of tax deferral can make a modest but real difference in how much money you’ll have for retirement later on. RMDs show up as taxable income on your 1040 form and are also taxed by many states.
To take advantage of this, you’ll need other sources of income until you turn 73. Fortunately, interest rates are up, and today you can earn more on money-market accounts, bank certificates of deposit, and fixed-rate annuities, which are issued by insurers and typically pay higher rates than bank CDs of the same term.
Retirees can now defer taxes on more of their money thanks to more generous rules on qualified longevity annuity contracts (QLACs). An IRA owner can now place up to $200,000 of his or her IRA balance in a QLAC, up from $145,000 previously. The previous restriction that limited contributions to 25% of the account balances in IRAs has been lifted.
Here’s why it’s valuable. A QLAC is a type of deferred income annuity designed to meet IRS requirements that’s only available for retirement plans. The money in one is excluded from assets on which your future RMDs are calculated. For instance, if you’ve placed $200,000 in a QLAC and turn 75 this year, you’ll reduce your 2023 RMD by $8,130, according to www.investor.gov.
You pay a single premium and then choose when to start receiving a stream of guaranteed lifetime income by age 85 at the latest. Deferring RMDs lets you keep more of your retirement plan assets intact and tax-deferred. But the biggest benefit is creating a guaranteed lifetime stream of income that will never decrease no matter how long you live. It’s essentially a private pension that you control.
You can choose an individual or a joint lifetime payout, with the latter paying out income until the second spouse dies. The joint payee must be a spouse, which satisfies IRS death-transfer rules. There’s also a cash-refund option, in which beneficiaries can get a lump-sum payout for any of the initial deposit premiums not yet paid out at the death of the annuitant(s).
Each spouse can now allocate up to $200,000 to a QLAC
The IRA catch-up provision, which lets people 50 or older add up to $1,000 beyond the normal contribution limit, will be indexed for inflation starting in 2024. Additionally, (though not part of the SECURE Act), the maximum you can contribute to your standard and/or Roth IRAs this year is $6,500 if you’re under 50 and $7,500 if you’re 50 or older. That’s a $500 increase.
The SECURE 2.0 Act gives you the chance to defer taxes on more of your retirement money via the extra year of deferral and more generous limits on QLACs. If you have the cash flow or savings that let you take advantage of these opportunities, you can benefit.
Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and immediate-income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. One of America’s top experts on annuities, he writes on retirement income and annuities regularly.
A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.
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