An unmarried 70-year-old saver is using a Qualified Longevity Annuity Contract to defer $210,000 of a $1.8 million 401(k) plan [1, 2].
This strategy allows retirees to reduce their taxable income by postponing required minimum distributions, or RMDs, which the government otherwise mandates at a specific age. By moving a portion of their retirement funds into a QLAC, savers can lower their current tax burden while ensuring a source of income later in life.
The individual in this case manages a total 401(k) portfolio valued at $1.8 million [1]. By allocating $210,000 into the QLAC, the saver can push the distribution of those specific funds past the standard RMD window until age 85 [2].
Beyond the retirement plan, the saver maintains a separate taxable brokerage account valued at $250,000 [1]. They also receive an annual Social Security benefit of $32,000 [1].
Using a QLAC serves multiple purposes for a high-net-worth retiree. It reduces the total amount subject to RMDs, which in turn lowers the annual taxable income. This approach also extends the period of tax-deferred growth for the deferred amount, meaning the money continues to grow without being taxed until the payouts begin at age 85 [2].
Such financial planning is often used by those seeking to avoid higher tax brackets during their early retirement years. By shifting a portion of their assets into a longevity annuity, they create a financial safety net for their later years while managing their current cash flow more efficiently.
“The strategy defers $210,000 of a $1.8 million 401(k) past RMDs until age 85.”
This strategy highlights a growing trend in retirement planning where high-balance savers use specific insurance products to mitigate the 'tax torpedo' caused by RMDs. By legally delaying withdrawals, retirees can potentially keep their taxable income lower, which may reduce the taxation of their Social Security benefits and lower their overall effective tax rate during their 70s.
