As life expectancies continue to rise, coupled with historically low interest rates, the prospect that retirees face of running out of retirement funds is very real. Given the average life expectancy of a 65 year old female is age 90 and with conservative investment portfolios earning less than 3%, the paradox retiree’s face is daunting. Is there an opportunity to provide longevity risk protection in Retirement Plans and IRA’s?
One solution to the potential of an individual outliving their assets is to purchase a longevity annuity, which provides for the distribution of a stream of income payments starting in the future. The use of these annuities, however, has been constrained in the context of retirement plan or IRA assets by the application of the minimum required distribution (MRD) rules of the Internal Revenue Code. Under the MRD rules, distributions typically must commence to a participant by April 1 of the year following the year in which the participant attains age 70 ½.
Recently, the IRS and Treasury released final regulations providing that the calculations of MRD’s will not take into account Qualifying Longevity Annuity Contracts (QLAC’s) if certain conditions are satisfied. In other words, if the annuity contract is a QLAC, the value of the contract is disregarded in determining the participants account balance for MRD purposes.
While there are specific criteria for annuity contracts to qualify as QLAC’s, the 2 main ones are:
- Limitations on Premium Payments: The amount of premiums paid for the contract cannot exceed the lesser of $125,000 or 25% of the participants account balance. This is an aggregate limit that applies to all defined contribution plans and IRA’s of the individual.
- Latest Commencement Date: The annuity must commence no later than the first day of the first month following the participant’s attainment of age 85.
These new final regulations provide a meaningful opportunity for retirement plan participants and IRA holders to acquire a hedge against the risk of outliving their assets.