Save on Taxes! Defer Your IRA Minimum Required Distributions!

 We wrote about this topic earlier in the year, but we wanted to revisit it because it is so important.  Do you want to be able to defer those unwanted Required Minimum Distribution (RMDs) from your IRA after age 70½…?  Well now you can and at the same time avoid those unnecessary federal and state income taxes.

RMD rules require all individuals with qualified money to take distributions from those accounts beginning at age 70½, with respect to a portion of their total retirement savings, whether they need the income or not.  In July 2014, the U.S. Treasury Department removed a significant impediment to the ability of qualified plan participants and IRA owners to balance their use of annuities and other investments in their retirement plans by issuing final regulations that allow individuals to bypass Required Minimum Distribution (RMD) rules. 

The new regulations allow individuals to essentially defer a percentage of their RMD distributions and the taxes associated with those distributions with no penalty!  The individual establishes a Qualified Longevity Annuity Contract, or “QLAC,” a guaranteed deferred annuity, under which the amount of annuity payments is locked in at purchase, and those payments can be deferred at a later date up to age 85.

Limits on premiums / purchase payments 

  • Over their lifetime, individuals cannot allocate more than $125,000 of their qualifying retirement plan [401(a)/(k), 403(b), governmental 457(b)] and IRA (traditional; not Roth nor inherited IRAs) savings to QLACs.
  • Additionally, no more than 25% of the participant’s account in any one qualifying retirement plan may be allocated to purchase one or more QLACs. This limit also applies to traditional IRAs; however, rather than applying to each separate IRA, the limit applies to the aggregate of the individual IRAs. Unlike Roth IRAs, Roth accounts within retirement plans are eligible for QLACs because they are also subject to RMD requirements.
  • The 25% limit applies differently to plans and to IRAs.  Under a plan the 25% limit applies to the most recent valuation of the plan, and under an IRA it applies to the prior 12/31 aggregated IRA balance. In both cases the value includes the present value of any previously purchased QLAC or NQLAC under the plan or the IRAs.  The plan account value is also adjusted for any subsequent contributions or distributions. It is unclear whether this same adjustment applies to the 12/31 IRA value.

The bottom line is that individuals can avoid thousands of dollars in unwanted taxes every year.  They can leave a portion of their required minimum distributions inside their IRAs or qualified retirement plans; 25% of your IRA money up to a maximum of $125,000 can be deferred until age 85 if you so choose.