Tax Angle #12: Stretch Out An IRA With A Lifetime Annuity

A series of strategies for tax-wise investors. Table of Contents.

A Qualified Longevity Annuity Contract is a contract with an insurance company that (a) pays out a fixed monthly amount beginning at an advanced age and (b) is bought inside an IRA. The most you can put into a QLAC is $135,000 or a fourth of your IRA money, whichever is less.

This is a nice little enhancement to an IRA’s inherent tax advantages, enabling you to stretch out the IRA’s tax deferral by a few years. (Money not invested in the QLAC has to start coming out at age 72.) And it is indeed aimed at little people. It is of no interest to Mark Zuckerberg.

Example: At 65, you invest $135,000 of your IRA in a deferred annuity that pays $2,000 a month beginning when you’re 80, if you make it to that age. The money keeps coming as long as you draw a breath.

A fixed annuity is a fixed-income asset, taking a place in a portfolio that might otherwise have been occupied by bonds. In our example the annuity could replace a collection of 20 zero-coupon bonds, each with a maturity value of $24,000 and due between when you’re 80 and you’re 99.


First question: Why even buy one of these things? Presumably you’re not planning to wait until you’re 80 to enjoy life. Answer: By reducing the risk of outliving your assets, an annuity allows you to have more flings early in retirement. Flings here mean either high-risk investments (like stocks) or high living.

The annuity would cost you a lot less than those 20 bonds. This is not because the insurance company is a brilliant investor, but because the annuity leaves nothing for heirs. If you don’t care what happens to your heirs, buy the annuity, not the bonds, put the difference into stocks and plan some trips to Europe.

Second question: Why own a deferred annuity inside an IRA rather than outside? Suppose you have $270,000 to invest and want to divide it evenly between the annuity and a stock index fund. You could buy the stocks in the IRA and the annuity outside, or you could flip that arrangement. Which is better?

It turns out that it’s almost always better to own the stocks in the taxable account and the annuity in the IRA. That’s partly because the annuity allows you to delay IRA liquidation. There is also a more subtle factor: Dollars inside an IRA are worth less than dollars outside, because the IRA is pregnant with income tax due on withdrawal. You’re better off having the low-value dollars invested in the low-returning fixed-income asset while putting the valuable outside dollars to work in high-returning stocks.

For more on this subject, see Add Excitement To Your IRA With A QLAC Old-Age Annuity.

MORE FROM FORBES12 Tax Angles For Investors: What Will Survive The Democratic Congress?

Comments are closed.