Q&A: Should I Move IRA Money Into a QLAC?

Q&A: Should I Move IRA Money into a QLAC?

Question: I have about $500,000 in an IRA, and I make the annual minimum withdrawal. I’m thinking of putting some of that money into a QLAC — qualifying longevity annuity contract. I’m 73, and I can defer withdrawals from it until I’m 85. What’s your opinion?

Ric: A QLAC is a new variation of a very old product that the government has approved for use in retirement accounts. We are not fans.

The government, of course, is interested in any solution to the risk that Americans, who are living longer than ever before, might run out of money in their 80s and 90s and beyond. Hence the notion of a longevity annuity, which is fancy language for a traditional annuity with one key difference: With most annuity products, especially when they’re inside retirement accounts, you have to start making annual withdrawals at age 70½ — just as you are doing from your IRA. But with the QLAC, you can defer withdrawals until age 85, allowing that money to continue growing on a tax-deferred basis for an extra 15 years.

That sounds great — except for several problems. First, the interest rate on these products is low; a well-diversified portfolio could reasonably be expected to return more over those 15 years than the annuity. And annuities often have higher fees than alternative investments. Taxes are higher too. Then there’s the lack of liquidity; if you need the money sooner, you could face high surrender charges and other fees. And finally, there’s the question of the solvency of the insurance company. Are you sure you can rely on that for 15 years?

These are key reasons why we’re not enamored of these products. I would encourage you to keep your IRA invested the way it is if you’re comfortable with how the portfolio is allocated. If you have questions or would like to review your allocations, feel free to call us anytime. We’d be happy to help.

Originally published in Inside Personal Finance January 2016.

More Retirement Advice