The QLAC Strategy That Defers $210,000 of a $1.8 Million 401(k) Past RMDs Until Age 85

A 70-year-old saver with a $1.8 million traditional 401(k), $32,000 in annual Social Security, and a $250,000 taxable brokerage account faces rising ordinary income from required minimum distributions. Keeping retirement assets unhedged increases adjusted gross income, which can make a larger portion of Social Security taxable and trigger earlier IRMAA penalty tiers. A Qualified Longevity Annuity Contract can reduce the balance used for government RMD calculations because funds allocated to the contract are excluded from the RMD pool until age 85. SECURE 2.0 Section 202 expanded the allowance to a flat $200,000 threshold with inflation indexing that sets the maximum individual allowance at $210,000. Implementing a QLAC may require rolling employer 401(k) funds into a traditional rollover IRA, then allocating up to $210,000 to the contract.

"Allowing her retirement assets to remain entirely unhedged means that initial compulsory government distributions will inevitably inflate her ordinary adjusted gross income enough to pull a much larger percentage of her federal benefits into a taxable category while simultaneously exposing her to the earliest IRMAA penalty surcharge tier."

"Utilizing a Qualified Longevity Annuity Contract serves as an incredibly unique financial shelter because it directly decreases the underlying balance subject to government allocation rather than merely shifting the timing of future personal distributions. Section 202 of the SECURE 2.0 legislation permanently overhauled these guidelines by expanding the core contribution allowance to a flat $200,000 threshold while establishing an annual inflation indexing feature that solidifies the maximum individual allowance right at $210,000."

"A QLAC functions as a specialized deferred income vehicle designed specifically for traditional individual retirement accounts or qualified workplace 401(k) plans. Funds allocated toward this insurance contract are excluded from the aggregate pool used by the government to establish mandatory distributions up until age 85."

"Because the vast majority of standard corporate retirement programs fail to offer these structures, the first logistical step involves moving your employer funds into a traditional rollover IRA. From there, $210,000 can be reallocated, leaving a remaining balance of $1.59 million. Evaluating the math at age 73 reveals that compounding this adjusted asset pool at a 6% annual growth rate for 3 years brings the total balance to $1.89 million."

Read at 24/7 Wall St.