Life and Death Planning for Retirement Benefits

Chapter 10: RMD Rules for “Annuitized” Plans

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Roth IRA, therefore, buying an annuity that does not start payments until much later than age 70½ is “not a problem” for a Roth IRA. See § 408A(c)(5) ; Reg. § 1.408A-6 , A-14(d). Longevity annuities held in a Roth IRA are not considered QLACs and do not count when applying the 25 percent/$125,000 limit on QLAC purchases in the participant’s traditional IRA. A-17(d)(3)(ii). This regulation also provides rules for applying the limits after a QLAC owned by a traditional IRA is converted to a Roth. Since a QLAC is supposed to be insurance against living “too long,” it makes no sense for the QLAC to provide a death benefit. The cost of providing a death benefit must necessarily reduce the true “longevity insurance” the contract can provide. But human nature being what it is, people only want to buy this product if it is heads I win tails you lose, so the regulation permits certain limited death benefits that can be provided in a QLAC. In general, the permitted death benefits must either be in the form of one of the following types of survivor annuity, or , alternatively, the contract can provide a “return of premium” guarantee-type death benefit in lieu of any survivor annuity. (The contract could also provide no death benefit at all.) A-17(c)(4).  If the participant’s surviving spouse is the sole beneficiary, the contract can provide a life annuity to the surviving spouse provided the annuity payments do not exceed the annuity payments the participant would have received. A-17(c)(1).  If the participant died before the annuity starting date of his own annuity, a greater survivorship annuity to the spouse-sole beneficiary is permitted if necessary to satisfy the qualified pre-retirement survivor annuity (QPSA) requirements of § 417 [see ¶ 3.4.02 ; this would not apply to IRAs, which are not subject to this requirement], and the survivor annuity must commence no later than the annuity to the participant would have commenced had he lived. A-17(c)(1)(ii).  If the participant’s surviving spouse is not the sole beneficiary, the contract can provide a life annuity to the surviving beneficiary. If the beneficiary is the same age as, or older than, or not more than two years younger than, the participant, the maximum annuity is the same annuity the participant would have received. If the beneficiary is more than two years younger than the participant, the amount of the maximum survivor annuity is reduced per a table in the regulation. A-17(c)(2). Death benefits under a QLAC Like other “annuitized” portions of the IRA, the value of a QLAC is excluded from the account balance when determining the value of that account balance for purposes of computing the required minimum distribution from the nonannuitized portion of the account. See ¶ 10.3.01 . This may create a minor planning opportunity for certain individuals: Bob Example: Bob is nearing age 70½. Soon he will have to start taking required minimum distributions from his large traditional IRA. Because he is still working, his income (and his income tax bracket) are both high, so he is not feeling good about having taxable distributions from the IRA added onto that already-high income. By purchasing a QLAC now for $125,000, Planning use for QLACs