Many retirement planners advise their clients not to put an annuity in their qualified plan
accounts. But is this always the best advice?


By Daniel M. Stewart

Stewart Wealth Advisors


Many retirement planners steer their clients away from using annuity products in qualified plans,such as IRA accounts. Putting a tax-deferred annuity into a retirement vehicle that is already tax-
deferred is a bit like using an umbrella indoors, some advisors claim. But is this always the case, or are there instances where choosing to place an annuity into a qualified plan makes sense? As it turns out, the answer to this question is “Yes!”

For one thing, the qualifying longevity annuity contract (QLAC) changed many peoples’ opinions on the viability of annuities in company retirement plans. Introduced in 2014, the annuity rule change lets you put the lesser of 25% of your IRA or 401k account’s value, or $135,000, into a deferred or longevity annuity. One of the primary benefits of putting an annuity into your qualified plan is one that many people don’t know. When you use a QLAC in your plan, you do not have to take the dreaded required minimum distributions (RMDs) from the money you’ve put into that annuity.

A word about RMDs

Your financial advisor may have mentioned RMDs when they designed your retirement strategy. Just in case they did not, I will remind you that RMDs are the lowest amounts the IRS says you must withdraw from your qualified retirement accounts once you reach a certain age. Failure to take your RMDs on time may mean you will cost you money in the form of severe penalties.  The Setting Every Community Up For Retirement Enhancement, or SECURE Act (who thinks of these names?) of 2020, increased the age for RMDs to 72. Before Congress enacted SECURE, people with qualified employer-sponsored plans or IRAs had to start their RMDs in the year in which they turned 70 ½. There was a deadline for the initial RMD set on April 1 of the following year. In 2020, the new age for beginning RMDs, which keeps the deadline of April 1 of the next year, is 72.

Depending on your financial circumstances, you probably were not affected by delayed RMD ages. However, speaking with your advisor about strategies, such as well-timed Roth IRA conversions or other tax-efficient tools you can leverage, is still a wise idea. If you want to know your RMD, you can divide your qualified plan balance by what the IRS says is your life expectancy factor. You’ll find this information, along with calculators and other tools, on the IRS website.

RMDs inside a Roth IRA

RMD rules do not apply to owners of Roth IRAs while they’re alive since the money in a Roth is already taxed. Any cash you withdraw from a Roth when you retire is tax-free. That includes money generated by a QLAC inside your Roth IRA. Purchasing an annuity for your Roth can mitigate against risk while helping grow your account's value. An annuity also creates a stream of lifetime income during retirement. When determining whether you should add an annuity inside an IRA, you and your advisor will look at your overall money goals. For instance, a QLAC is probably not the ideal choice if you have a higher appetite for risk and want a Roth because you seek more aggressive growth. On the other hand, if you would like greater peace of mind knowing you’ll have a source of income you won’t outlive, then an annuity might be ideal.

What’s the right kind of annuity to hold inside an IRA.

As mentioned earlier, a longevity annuity is the correct category of annuity contract to go inside an IRA. Within the longevity annuity category, you can either have fixed or variable annuities. One of the best features of these annuities is that they are customizable to fit your retirement strategy and money goals. Fixed annuities contractually guarantee you a fixed interest rate on your contributions.  Variable annuities offer you investment options and fluctuate with the market. They are riskier instruments than fixed annuities.  On the other hand, a fixed annuity can be the safety portion of your portfolio, acting much like a bond but providing many more features.

Pros and cons of using QLACs

A QLAC strategy may only be suitable for some retirees. While there are several advantages, there are also some potential downsides to using QLACs inside a qualified plan.
You could outlive your distributions. Because QLACs are lifetime annuities, if you decide to defer distribution until you reach your 80s, there’s a chance you’ll die before you collect. Many annuities address this possible pitfall by offering options in the contract to pass the remaining payments on to a spouse or other beneficiary or select a return of premium option that pays a death benefit to your beneficiary. You can only put a limited amount into a QLAC. The maximum you can put into a qualified longevity annuity inside an IRA is 25% of the account’s value or $130,000. That isn’t much, considering that once you buy a QLAC, you forfeit control of that money. As the world’s
economy falters, you may find flexibility and control are increasingly important.

QLACs are not all the same. Surprisingly, QLACs differ significantly, and distributions may be higher from one company to the next. That’s why it is so critical to meet with an annuity specialist and shop around when purchasing a QLAC.

The bottom line: The annuity product offers many attractive benefits for those who would like income for life, protection against running out of money in retirement, guaranteed rates of return,create an income stream for a loved one should you die earlier than anticipated.

Placing a qualified longevity annuity in a company plan is sometimes an effective RMD strategy, especially for investors seeking greater peace of mind or tax efficiencies. But, there are potential downsides you must factor into your decision.  If you are looking at QLACs, it’s a good idea to meet with an income specialist or financial planner and discuss the pros and cons.

Just call my office at (239) 325-5115. I am always glad to assist if you’d like another set of eyes to review your safe money strategies.

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