Question: “I will turn 73 this month. I have two IRAs, a Roth, a 401(k), and two 403(b)’s, totaling over $1 million. I am fortunate to have a decent pension, and even with the Windfall Elimination Provision, I can still get a small sum after my Medicare B & D withholdings. After taxes from retirement, my monthly income is approximately $7,200 a month. I have a mortgage of just under $25,000. I rent out this property for six months a year. I still work part-time as a substitute teacher a couple of days a week and have a gig economy job that pays roughly $10,000 a year. I lease a car at $388 a month (I write it off as I file a Schedule C).
Unless something unforeseen happens, I don’t need the money from these plans, but I know I have to take it. The only things certain in life are death and taxes, but I’d like to kick the can down the road and use $100,000 from one of the IRAs to fund a QLAC to reduce my RMDs. Do you think this is a smart move? What kind of financial adviser should I hire to help me execute this?” (Looking for a financial adviser too? You can use this free tool from our partner SmartAsset that can match you to a financial adviser, as well as sites like CFP Board and NAPFA.)
Answer: There are a few things to tackle here. “First, that lease is probably not tax-deductible. You probably used it outside of your gig economy job, so only a portion is deductible. If the gig economy job is considered a taxi for hire, like Uber or Lyft, you must take the standard mileage deduction. In short, your taxes are probably wrong and you want to fix them before the IRS visits,” says Robert Persichitte, a certified financial planner at Delagify.
Second, for the QLAC, or qualified longevity annuity contract, you’re trying to solve a tax problem that doesn’t exist yet, says Persichitte. “Before considering such an expensive option, consider your objectives and why that makes sense. Generally speaking, good tax planning aims to reduce your lifetime taxes. One of the options is Roth conversions, but there are a whole bunch of other strategies. If you aren’t ready to pay an adviser to manage your assets, you can find someone who is project-based or fee-for-service based. Most CPAs can run the numbers for you and charge less than an asset manager, just make sure if you go that route that your investments are appropriate for your needs,” says Persichitte.
QLACs can be helpful in terms of providing steady income later in retirement as they’re not subject to market fluctuations and once you begin receiving payments, you’ll receive them as long as you live. The tax impact of QLACs is another benefit as they lower the overall balance of your account which subjects you to lower RMDs and a lower tax bracket. On the other hand, QLACs lack flexibility that other products offer and they’re often irrevocable, meaning once you decide to buy one, you’ll be stuck with it forever.
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Everything you’ve said indicates that you won’t need these deferred income retirement accounts. “Still, you should always consider that perhaps in the future, you may have unexpected expenses, such as long-term care costs, which can be significant,” says Alonso Rodriguez Segarra, a certified financial planner at Advise Financial. “Suppose you gave your money to an insurance company by acquiring a QLAC. In that case, you would no longer have the independence to use that money for it. Likewise, it would help to remember that many of the annuities are famous for their high costs, which are really complex to calculate when you do not have the help of a financial specialist.”
Hiring a CFP to help you simulate different scenarios would be helpful, pros tell us — and you can use this free tool from our partner SmartAsset that can match you to a financial adviser, as well as sites like CFP Board and NAPFA.
Increasing the amount you must withdraw each year, optimizing your tax bracket, trying not to affect your IRMMA (Income-Related Monthly Adjustment Amount) surcharges and applying a ROTH conversion strategy are all things a pro can help with. “Likewise, if you are inclined to make donations, it would be essential to review a qualified charitable distributions strategy, being able to give more than $100,000 in 2024 and thus reduce the amount you would have to give in RMDs. As you can see, many variables would be convenient to review with a CFP,” says Segarra. For this type of work, you’ll want to search for a planner who is fee-only and who works on a project basis or by the hour. Project-based advisers tend to cost between $1,500 and $7,500 while hourly advisers often charge between $150 and $450 per hour.
On the other hand, Jim Hemphill, certified financial planner at TGS Financial, says he believes QLACs are one of the most under-utilized planning vehicles. “Since interest rates normalized in 2022, we’ve recommended them often … A higher end insurance practice should understand and be able to place a QLAC. There are only a few insurance companies offering QLACs, so the choices are limited, but the moving parts are quite simple and all the contracts we’ve examined offer similar payouts. If you have heirs or dependents, you’ll want to elect a QLAC that offers a cash refund option,” says Hemphill.
When it comes to kicking the tax can down the road, a QLAC can do that for you. “You’ll have to be comfortable with the fact that you may be paying higher overall lifetime taxes because that (taxes) can get bigger the further you kick it. For many clients, it’s like pushing on the end of a balloon. They make the balloon smaller on the present day, but bigger on the future end and it pushes them up into higher tax brackets in the future. They pay less tax this year but more taxes over the next 20,” says certified financial planner Mark Struthers at Sona Wealth Advisors.
There’s also the issue of whether the annuity is the right use of the funds. “There could be other investments that are a better fit, or maybe it’s best to pay off your mortgage or build up your emergency fund. You may also want to leave a legacy or give to charity. If giving to a charity, a QCD might be a good option. The tax tail should not wag the investment dog. Taxes should be considered but should not be the only factor,” says Struthers.
For his part, Persichitte says the biggest thing to avoid is a commissioned insurance agent. “They will 100% tell you to get the QLAC because that’s how they get paid. There really isn’t enough information to say if it’s a good idea or a bad idea, but nine times out of ten, it’s a bad idea,” says Persichitte. Keep in mind that QLACs are sold by brokers, financial advisers with insurance licenses, insurers directly and online annuity platforms.
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