Tag: 401k

QLAC 101

August 15, 2024

If you’ve saved well for retirement, then you may find you can cover your living expenses without needing to withdraw from your retirement accounts. But if you think that by age 73, you won’t need your full required minimum distributions or RMDs, then you might want to consider getting a qualified longevity annuity contract, or QLAC.

Anyone between the age of 18 and 75 can purchase a QLAC, but there may be some people that this annuity makes more sense for. If you’re looking to avoid the market risk on some retirement accounts and ensure a steady, guaranteed income in retirement, a QLAC is probably a good fit for you. If you also have concerns about the longevity of your savings and having enough money later in life, then you may benefit from a QLAC.

Here’s everything you need to know about a QLAC before deciding if it’s right for you.

How a QVAC Could Lower Your RMDs

A QLAC is a deferred fixed annuity contract sold by insurance and financial companies that you purchase with money from a retirement account, like a 401(k) or an individual retirement account (IRA).It’s important to know that Roth IRAs cannot be used to purchase QLACs as they do not come with RMDs to begin with.

RMDs are mandated starting at the age of 73 as of this year, but that will rise to age 75 in 2033. One appeal of the QLAC is that it can reduce the balance in your retirement accounts used to calculate those RMDs. “People tend to spend their RMDs,” says Steven Kaye, a financial planner in Warren, New Jersey. “So a QLAC forces people—in a good way—to leave more money in their IRAs,” he says.

One way to avoid using your RMDs is to use the funds from one of your retirement accounts to purchase a QLAC, which will guarantee that you receive regular payments for as long as you live. “So, if you used 25% of a $400,000 qualified account, your $100,000 purchase of a QLAC would immediately reduce your RMDs by 25%,” says Jerry Golden, investment advisor. “And the income from a QLAC could be deferred until as late as age 85,” he says.

When you choose a QLAC, you’ll be able to set your payout date, which is when you’ll begin receiving payments. Just like with Social Security, the longer you wait to receive payments, the higher the payments will be. Once you have a QLAC, you’ll be able to delay RMDs until the payout date of your QLAC, which can be no later than age 85.

The Tax Benefits of Having a QLAC

Once you withdraw money from your QLAC, you’ll need to pay income taxes on it. However, a QLAC can be an efficient tax planning strategy. For example, by using $100,000 of a traditional IRA to purchase a QLAC, you’ll reduce the balance of your IRA by $100,000, which will lower the amount you’ll need to take out for RMDs. The lower your RMD, the lower your income will be on that, which could significantly reduce the income tax you’ll owe.

QLAC Contribution Limits and Inflation Riders

You are now permitted to buy a QLAC for up to $200,000 from an eligible retirement plan. Previously, you were limited to whichever was lesser of $145,000 or 25% of your account balance. The current $200,000 upper limit is a combined cap that applies to all of your eligible retirement accounts, even if you take money from different accounts or purchase more than one QLAC. But if you and your spouse have your own eligible retirement accounts, then you can each spend up to the $200,000 limit on your own QLACs.

Since a QLAC locks in future payments, you are protecting your retirement money from market dips later in life. But unless you purchase an inflation rider with your QLAC, which will lower the initial amounts you receive from an annuity, your monthly payment may lose value over time.If you’re considering acquiring a QLAC, then you’ll want to work with a financial advisor to make sure you’re picking the right one.

Considering Your Spouse When Purchasing a QLAC

Some QLACs offer a survivor payout, also referred to as contingent annuity payments. These would continue your annuity payments to your designated beneficiary, which is usually a spouse, after your death. Other QLACs offer death benefits that would return any unused premiums to your beneficiaries through a lump sum or series of payments. If you have a spouse or individuals who will depend on your annuity after your passing, then you need to make sure any QLAC you choose has one of these features. Without these features in your annuity, your survivors would get nothing.

In addition to making sure your QLAC comes with a survivor payout or death benefit, you may also consider getting a joint QLAC with your spouse. If you’re married, a joint QLAC would provide income payments that continue for as long as one of you is alive. The only downside to choosing a joint contract is that it decreases your income payments, compared to a single life contract.

When a QLAC Isn’t For You

If you’re 65 and in poor health, you probably don’t want to wait until age 85 to start receiving income payments, so a QLAC may not benefit you at all. “If the probabilities are that you have a longer than average life expectancy, QLACs can be a windfall,” says Artie Green, a financial planner. “But if you have a shorter than expected longevity, of course, that works against you with any annuitization.” QLAC recipients can use their funds on whatever they want, but often they spend it on late-in-life health care or housing costs. The purpose of a QLAC is longevity protection that could minimize or even eliminate the risks of running out of money.

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There are really only two scenarios in which a QLAC is a good fit. The first is if you have reached age 73 and do not need your RMDs to cover expenses. The second is if you think you’ll reach 73 and not have enough funds to pull from. QLACs can be a safeguard that guarantees you an income late in life, while also reducing your need for RMDs and even lowering your income taxes on them. At Insureyouknow.org, you may keep all of your financial and retirement planning in one place, making it easy for you to forecast and plan for your future.

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Which is Best: Health Savings Account or Flexible Spending Account?

February 1, 2024

While a health savings account (HSA) and a flexible savings account (FSA) both help you to set money aside for health care costs, they are not the same. Both accounts are often offered by employers, but it is possible to open an HSA independently as long as you have a HSA-eligible health plan in place. FSAs however are strictly employer-based and can only be contributed to if your employer offers them to you. Here are six key differences to know between HSAs and FSAs.

An HSA Belongs to You, Not Your Employer

Whether or not you opened up a HSA through your employer-offered insurance, the funds within your HSA belong to you forever. You may even use your HSA to cover health insurance costs if you leave your current job. On the other hand, FSA funds belong to your company, and when you leave them, you forfeit your FSA.

This is not to say a FSA can’t be advantageous, as long as you intend to stay with your current employer. “The FSA basically works with any kind of health insurance plan,” says Roy Ramthun, president of HSA Consulting Services. “So from that perspective, the ‘flexible’ in the name is pretty good.”

Both Accounts Have Contribution Limits

Each year, the IRS determines maximum annual amounts that can be contributed to both HSAs and FSAs. Employers may also apply their own limits to their employee FSAs. For 2024, the IRS individual contribution limits for HSAs will be $4,150, while the family limit will be twice that. In 2024, the maximum contribution for FSAs will be $3,200. While a HSA has a higher contribution limit, your employer may be contributing to your FSA for you, which may allow you to contribute more of your earnings into your own HSA.

HSA Funds Carry Over

With an HSA, you may carry over unused funds from year-to-year indefinitely. This is helpful when you have more in your account than you can use before the year’s end. With the HSA, your funds won’t go wasted. This is why it is a great way to save up for unexpected health costs down the road.

Alternatively, FSA funds must be used before the year is over, or you’ll forgo the existing funds when the calendar year starts over. Some employers may allow you to carry over part of the funds or provide you with a grace period to use your funds, which is generally two and a half months. Since FSAs are offered through your employer, it will be important to inform yourself of their policies around the account.

FSAs are More Accessible at the Beginning of Each Year

While your FSA funds don’t rollover, if you or your employer plan to contribute your entire limit at the beginning of the year, then that entire amount is available to you immediately. HSA funds accumulate over the year, which means that if you need access to more coverage midyear, you may not have enough money in your HSA to pay your medical bills. The upside to this is that you should be able to reimburse yourself for previous medical expenses from your HSA once those funds become available.

The HSA Can be an Investment Strategy

Unlike an FSA, the HSA can gain interest over time. Couple this with the fact that your funds carry over year to year, and the HSA offers the potential for growing quite a sizable nest egg for potential health care coverage. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2023 may need up to $315,000 saved just to cover health care expenses in retirement, while a single individual will need approximately $157,500.

At 65, the HSA Can Act as a 401K or IRA

Before the age of 65, you will be subject to a 20% penalty if you use your HSA or FSA funds for anything other than medical expenses. But once you’re 65 or older, that fee is waived, which means that those HSA funds are only subject to income taxes no matter how you use them. While you avoid the 20% penalty over the age of 65 with a FSA as well, those funds can still only be used for health care coverage.