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The Annuity With a Tax-Planning Twist

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Retirees sometimes feel like they’re being squeezed by two opposing goals. On the one hand, they should conserve their nest egg to prepare for longer life expectancies and the rising cost of long-term care. On the other, the IRS requires retirees to start drawing down their savings with required minimum distributions at age 72.

A qualified life annuity contract satisfies both goals. QLACs are a type of deferred income annuity. You transfer a portion of your savings from a retirement account, like an IRA or a 401(k), to an annuity company to purchase your contract. As of 2020, you can invest the lesser of $135,000 or 25% of your retirement account balance in a QLAC. The annuity company turns your deposit into payments, which you can delay taking until as late as age 85. Once you start receiving annuity income, the payments are guaranteed to last your entire life.

Steven Kaye, managing director at Wealth Enhancement Group in Warren, N.J., describes QLACs as a form of longevity insurance. “If life expectancy at retirement is 85, that means half of retirees will live longer than age 85,” Kaye says. “By converting a portion of their savings into a QLAC, they create a stream of future income that they cannot outlive.”

Although QLACs have been on the scene since 2014, they are hardly a household name, but legislation in 2019 and a rising tide of baby boomers entering their 70s could launch these contracts out of obscurity and into the retirement planning spotlight.

Besides generating lifetime income, QLACs can also help reduce required........

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