Charitable Remainder Trusts (CRTs): Sell Assets Tax-Free and Create Lifetime Income
QLAC Strategy: The ‘Longevity Insurance’ That Kills RMD Taxes
COACHING POINTS
- The Double Benefit: A QLAC (Qualified Longevity Annuity Contract) solves two major retirement problems at once: It reduces your current taxes (by deferring RMDs) and provides guaranteed income in your later years (Longevity Insurance).
- The RMD Hack: The IRS forces you to withdraw taxable money from your IRA starting at age 73. However, funds invested in a QLAC are excluded from the RMD calculation until age 85. This keeps your tax bracket lower during your 70s.
- The Psychological Edge: By locking in income for your 85+ self, you give your 65-year-old self permission to spend the rest of your portfolio. You don’t need to hoard cash “just in case” you live to 100.
The biggest fear in retirement isn’t dying; it’s outliving your money.
The QLAC is not an investment; it is insurance. Just as you buy fire insurance for your house, you buy a QLAC for your lifespan.
Thanks to the SECURE 2.0 Act, you can now shield up to $200,000 of your IRA from the taxman’s immediate reach.
Source: IRS Treasury Reg. 1.401(a)(9)-6
Impact of moving $200,000 into a QLAC at Age 73.
- Total IRA Balance: $1,000,000.
- Standard RMD (Year 1): $1M / 26.5 = $37,735 (Taxable Income).
- With QLAC ($200k): New RMD Base = $800,000.
- New RMD (Year 1): $800k / 26.5 = $30,188.
- Annual Tax Savings: You defer taxes on ~$7,500/year. Over 12 years (age 73-85), this keeps substantial capital compounding tax-deferred.
What-If Scenario: The ‘Living to 95’ Risk
Comparison: Standard Portfolio withdrawal vs. QLAC Strategy.
| Age | Standard Portfolio (4% Rule) | QLAC Strategy |
|---|---|---|
| 70-84 | Withdraw $40k/yr (Portfolio Depletes) | Withdraw $40k/yr (RMDs Lower) |
| 85+ | High Risk of Depletion | Guaranteed Income Starts |
| Outcome | Running on fumes | Cash flow replenishes automatically |
Result: The QLAC acts as a “Backstop.” Even if the market crashes or you spend everything else, the QLAC check arrives every month starting at age 85.
Visualizing the Income Gap Filler
| Age | Portfolio Withdrawal ($) | QLAC Income ($) |
|---|---|---|
| 75 | 50000 | 0 |
| 80 | 50000 | 0 |
| 84 | 50000 | 0 |
| 85 | 10000 | 40000 |
| 90 | 0 | 50000 |
| 95 | 0 | 50000 |
*Notice the transition at age 85. As your portfolio depletes (Blue), the QLAC (Red) kicks in to maintain your standard of living.
Execution Protocol
Under SECURE 2.0 Act (2023), the lifetime limit for QLAC premiums is $200,000 (indexed for inflation). This applies per individual, not per account. Ensure you do not exceed this cap across all your IRAs.
Life Only: Highest payout, but money disappears if you die early.
Cash Refund: Slightly lower payout, but if you die before receiving $200k back, the difference goes to your heirs. (Recommended for peace of mind).
You can start payments sooner, but to maximize the “Longevity Insurance” leverage and RMD deferral, set the start date to the maximum allowed (Age 85).
COACHING DIRECTIVE
- Do This: If longevity runs in your family and you want to ensure you never become a burden to your children in your 90s.
- Avoid This: If you have poor health or a shortened life expectancy. You will likely die before the payments begin, making it a bad mathematical bet (unless you choose Cash Refund).
Frequently Asked Questions
What is a QLAC?
A Qualified Longevity Annuity Contract (QLAC) is a type of deferred annuity purchased within a retirement account (IRA/401k). Unlike standard annuities, income payments are deferred until a later age (usually 85), acting as insurance against living too long.
How does it reduce taxes?
Money moved into a QLAC is exempt from Required Minimum Distribution (RMD) calculations until income payments begin. By shifting up to $200,000 into a QLAC, you lower your IRA balance subject to RMDs, thereby lowering your taxable income between age 73 and 85.
What is the ‘License to Spend’?
Many retirees pinch pennies because they fear running out of money at age 95. A QLAC guarantees a paycheck at 85+, effectively securing your ‘old-old’ years. Knowing this allows you to spend your remaining portfolio more aggressively during your healthy years.