Advanced Underwriting Consultants

Ask the Experts – July 16, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client is considering purchasing a longevity annuity for his IRA. The annuity doesn’t kick in until he has reaches age 85. How does he satisfy his RMD requirements on the value of the annuity?

Answer: The IRS recently issued final regulations addressing longevity annuities.

Generally, RMDs are calculated based on the IRA account balance as of December 31 of the previous year after the account owner turns 70 ½. However, as long as an annuity is a qualifying longevity annuity contract (QLAC), it is not taken into account when determining RMDs.

To be considered a QLAC, the contract must meet several requirements:

    1. Premium limitations: The amount of premiums cannot exceed the lesser of $125,000 or 25 percent of the aggregate non-Roth IRA account balances (including the value of any QLAC in the account).
    2. Age limitation: The contract’s commencement must be no later than the start of the month after the account holder turns 85.
    3. Post-commencement: After distributions commence, the contract must meet RMD requirements.
    4. Surrender/commutation limitations: The contract cannot allow for any commutation benefit, cash surrender right, or other similar features.
    5. Death benefit limitations: The contract cannot provide a death benefit other than a return of premium feature, which would allow the beneficiary to receive up to the amount of premiums paid on the contract, less the amount the contract has already paid out prior to death.
    6. Statement of intention: The contract must state that it is intended to be a QLAC.
    7. Annuity limitations: The contract cannot be a variable, indexed, or similar type of annuity.

If your client purchases an annuity that meets these requirements, then she won’t be required to take RMDs on the value of the contract until payments begin.

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