Part 3 of our exploration of Required Minimum Distributions (RMDs) from Qualified Retirement Accounts is dedicated to the RMD-reducing “product” known as the Qualified Longevity Annuity Contract, or QLAC. We use the term “product” because QLACs are insurance contracts (products) issued by large insurance companies. Generally speaking, a QLAC is a deferred annuity within an IRA that defers RMD payments on the QLAC amount until the owner reaches a pre-selected age. The year-end IRA Account value, less the QLAC value, determines the following year’s RMD amount.
The maximum QLAC-based deferral age is 85.
Some IRA owners facing their RMD year are not looking forward to taking the entire RMD (usually for tax reasons). Not needing current income, they prefer to defer the RMD income for a period of time. Some may be planning to work for a while, and others may never need the RMD, due to having sufficient income from other sources. The QLAC is flexible in deferring its portion of the total RMD until the contract expires (date chosen by purchaser, up to age 85).
For tax year 2026, the maximum QLAC contract value is $210,000 per individual IRA owner. For the owner of a $1 Million IRA, purchasing a maximum QLAC would decrease next year’s RMD by over 20%. This RMD reduction, with corresponding tax savings, carries on until the expiration of the QLAC, which was chosen by the account owner when the Contract was purchased. This could be one year, or many, up to a maximum age of 85.
As with all things IRA, IRS, and insurance products, QLACs are complex. Understand the concept and the product before you buy. Here are a few thoughts, not intended to be a comprehensive list:
- QLACs do not change in value, as they have no. rate of return
- Their value lies solely in the delay of taxable income from the IRA’s RMD during the selected life of the QLAC.
- QLACs are required to pay RMDs directly to the owner, beginning after the selected life of the QLAC, based on current age.
- Upon expiration of the QLAC Contract, any unpaid value in the QLAC is paid out to the beneficiary (insurance company does not keep your money, as many people believe).
Assets preserved through deferral of current taxation using the QLAC are as valuable as the tax deferral feature of the IRA during working and contributing years. The rate of return on the QLAC should be considered to be the owner’s marginal tax rate for every year of ownership.
Last week, I wrote this: “Required Minimum Distributions, or RMDs, are the eventual price Uncle Sam exacts from each of us for the multi-year tax-deferral privilege they granted us during our working lives.” In our day jobs as financial advisors, we frequently meet people who would rather not have to withdraw the funds from their retirement accounts. While we understand their positions, we also maintain that the RMD requirement is reasonable. In my opinion, our ability to contribute and grow Retirement funds in tax-deferred accounts over decades is vastly more significant than later taxes on the RMD requirement.
For many Retirement Account owners, the RMD requirement fits into their retirement lifestyle when used as a replacement for the monthly income formerly received while working. Timing of RMD payments is only bound by the calendar year, with annual, monthly, or quarterly withdrawals treated the same by IRS. Federal Tax withholding can be structured to work like paycheck tax, but no FICA or Medicare withholding applies (RMDs are “unearned income”).
Timing of RMD withdrawals is a personal, needs-based decision, with as many available permutations as account owners. With flexibility comes the opportunity to tailor withdrawals to your needs and/or wants. Our clients’ requests span the gamut, ranging from transactions (such as car purchases or dream vacations), to monthly income streams or investment of the net proceeds in taxable brokerage accounts.
Most retirees welcome the income they receive from RMDs, but (for tax reasons) some would rather reduce their annual RMD withdrawal requirements. For these folks, there are two relatively unknown options, called Qualified Charitable Distributions (QCD) and Qualified Longevity Annuity Contracts (QLAC). Although they are completely different strategies, both are effective methods of reducing future taxable RMDs.
IRA owners who are subject to RMDs and are charitably minded can now distribute donation funds directly to their qualified charities, while saving themselves income tax on the QCD amounts. Rather than receiving direct (and therefore taxable) distributions from their IRA, an account custodian (Schwab, Fidelity, etc.) sends a check directly to the charity. This amount reduces the RMD dollar-for-dollar, but is not counted as income to the Account Owner. No income, no tax, on all QCD funds (up to the current $111,000 annual limit).
We should note that all IRA owners who have attained age 70-1/2 are eligible to execute QCD transactions. Under the new, higher RMD age limits, this feature was not restricted by any increased age requirements.
Next week, we will cover the QLAC option for postponing a portion of RMD requirements for IRA owners who do not need current income.
Required Minimum Distributions, or RMDs, are the eventual price Uncle Sam exacts from each of us for the multi-year tax-deferral privilege they granted us during our working lives. For years, Retirement Account (Traditional IRA, 401(k), etc.) withdrawals were mandated to begin in the year the account owner reaches age 70-1/2. In 2018, his unwieldy number was thankfully replaced by (and increased to) 73 for people born between 1951 and 1959. In 2025, the RMD age became 75 for those born in 1960 or later. These changes reflect increasing life expectancies and the need to preserve retirement assets over a longer retirement.
For the year in which an account owner achieves RMD age, there is a 1-time withdrawal exception allowed. The first RMD can be delayed until the first quarter of the following year, which is generally used by people who are retiring in their RMD birthday year. This allows taxable RMD income to be deferred until the year following retirement, when working income terminates or is reduced.
The timing of the RMD distribution date should consider the account owner’s need for income. Most people delay the annual RMD as long as possible, thereby allowing more time for tax-free growth throughout the year. For owners who don’t need the income and would prefer to withdraw smaller accounts, it may be smarter to take the distribution early in the year. This action intentionally reduces further appreciation of the RMD funds, consequently reducing the next year’s RMD.
Most RMDs are paid in cash, and many apply Federal Tax withholding to cover the added income from the RMD. However, it is perfectly acceptable to distribute shares of stocks, ETFs, or Mutual Funds. Taxes can be paid from another source or through a separate distribution of cash.
Assets distributed as an RMD must be distributed to a taxable account, and are taxed as ordinary income in the year they are rolled out of the Retirement Account. These assets receive a step-up in basis. Whenever the taxpayer sells those assets, gain or loss will be calculated using the price received, less the new basis. Appreciated assets held for over a year will be taxed at favorable Capital Gains rates (some exceptions apply). Gains taken in less than one year are taxed as ordinary income. Losses on asset sales work the same way, depending on the holding period, with the same one-year holding period rules.
Failure to take any Required Minimum Distribution results in a serious financial penalty. RMDs are not eligible for Roth Conversion, as they would be classified as excess contributions. RMDs are required to be completed prior to the owner performing any Roth Conversion from the affected account.
Today’s job market is greeting graduates everywhere with ambiguity. Technology is advancing at a rapid pace, driven by Artificial Intelligence (AI), which, just a few short months ago, was mostly a mysterious concept for Americans. AI is now everywhere, adding to career uncertainty.
Employers of today are seeking changing skill sets from graduates. College as a necessity is losing popularity for many students and their parents, not to mention potential employers. Skilled trades are in demand, but most employers are experiencing shortages of potentially qualified trainees. Paid apprenticeships are not only available, but scholarship money is sitting idle.
Dirty Jobs creator Mike Rowe is sitting on pools of cash, awaiting applications for scholarships to learn such skills as welding, electrical, plumbing, etc. Check out his website mikeroweworks.org, and you will be greeted with this message: “AI-Proof Six-Figure JOBS.” This is an enticing prospect, and Mile Rowe has already demonstrated his sincerity and effectiveness over decades.
Today’s graduates, whether from high school, secondary education, or post-graduate school, are likely not well equipped to manage their future personal financial situations. For decades now, Americans have been undereducated in finance and economics, and the results have not been a pretty sight. Hopefully, that may be changing for the better.
Whether their eventual retirement realities will resemble earlier dreams likely depends primarily on their own lifetime of choices. Sadly, there are no “do-overs.” Individual actions and decisions throughout decades of working and saving direct outcomes for retirement lifestyles.
Today, whether entering the labor market or higher education, this is a time of high uncertainty. As a graduate of any level, you have no say in the conditions you find “on the ground.” Some graduating classes are fortunate to arrive into an economy that welcomes them with open arms and jobs galore. For others, hiring may be suspended for a time. A cyclical economy is to blame, but that is small consolation for unfortunate job seekers during bad times. However, we are not currently in bad times, and opportunities abound.
Our society is in a state of rapid change, which must be approached with flexibility and an open mind. Some universities are receiving applications for Engineering students more than any other discipline. Who saw that coming?
Above all else, graduates should go out into the world with a positive attitude and a very open mind. Congratulations to each and every one of you graduates. Those who embrace AI, and learn as much as they can as quickly as possible, should be rewarded.
As financial planners, we are frequently challenged to assist clients with their retirement plans. Americans are universally attuned to (and afraid of) the potential problem of running out of money while still alive. That was less problematic in the days of lifetime pensions, especially when enhanced with the promise of lifetime Social Security. However, times have changed. Pensions have become scarce, and Social Security is facing hard times ahead.
Employers have mostly transitioned from providing lifetime pensions (Defined Benefit Plans) to 401(k) and many similar Defined Contribution Plans. Today, relatively few Americans can look forward to lifetime income from a private pension (Social Security is essentially a public pension, but that discussion is for another day). Plus, an increasing portion of us are skeptical of Social Security’s continuing ability to pay our promised lifetime benefits, which may be reduced in excess of 20%. That would place further onus on individuals to increase and extend their own retirement income. This option is difficult for Americans to accept.
Preparing for a comfortable financial future must include saving and investing. Long-term personal investing is the most viable method of individual wealth accumulation. Success in long-term investing is largely a function of Asset Allocation, otherwise known as Portfolio Diversification. Everyone is familiar with the old saying, “don’t put all your eggs in one basket,” and with good reason. One dropped basket, and you go hungry.
Due to increasing longevity, a potential retirement period could rival the length of an average work life. Today’s retirees should be wary of the common practice of “becoming more conservative investors” as they approach and enter retirement. Not to say that no changes are warranted for investors as they finish out their careers, but they need to pay attention to the concepts that made them successful.
The Asset Allocation that makes an investor successful during working years should not simply be trashed and replaced. We all need to stay concentrated on what made us successful investors while working. That means allocating resources to last (and grow) for many more decades.
Entertainer James Hubert Blake, affectionately called “Eubie,” was born in 1887, but he preferred to have everyone believe it happened in 1883. Before his death in 1983, he is credited with having said, “If I’d known I was gonna live this long, I’d have taken better care of myself.” Notwithstanding the truth, upon his passing, the “official” record honored his personal preference by accepting the 1883 birth date. Why not? Attaining the age of 100 is an ambitious goal.
Take better care of your financial life while you tend to your health.
Last week, we discussed reasons why taxpayers should not just file a Tax Return on April 15, then immediately forget about Tax Planning until next year. Ignoring Tax Planning is never a good idea. There are special circumstances this year that may reward Americans in ways not seen before. In addition to improving current year results, some people may be able to save enough from the Tax Return already filed to warrant filing a Corrected Return.
On July 4, 2025, President Trump signed the 2025 Working Families Tax Cuts Act (commonly known as the One Big Beautiful Bill Act, or OBBBA.) Provisions of OBBBA were retroactive to January 1, 2025, and the IRS did not have time to incorporate all the taxpayer-friendly provisions into the 2025 Form 1040 Individual Income Tax Return. Instead, taxpayers and their tax preparers were left to do their own research to assure best results.
OBBBA provisions so-called “no tax on tips” and “no tax on overtime” were made retroactive to January 1, 2025. Both are capped for each taxpayer and are gradually phased out according to overall income. That fact should not deter any taxpayers from understanding and utilizing the formulas. These exclusions can provide what is essentially “found money” for workers who earn tips and/or work overtime hours.
For taxpayers ages 65 and up, there is also a new $6,000 per person deduction from Taxable Income. This deduction is based on the concept of “no tax on Social Security,” and is available to seniors (must have attained age 65 by year-end), regardless of filing status. Additionally, even seniors who are not receiving Social Security monthly benefits qualify for the new deduction.
It is not necessary to itemize deductions to have this extra deduction reduce Taxable Income. Eligible taxpayers should all take advantage of the provision.
To put it mildly, OBBBA was a Godsend for both working and retired Americans. Not taking advantage of our new tax savings would be wasteful. For tax year 2025, there is an additional burden on taxpayers to know and apply the savings, but there is light at the end of the tunnel.
Employers will be required to issue a new style W-2 income reporting form at the end of 2026. Income from tips and/or overtime that may be excluded from Federal Income Tax will be itemized. Responsibility for claiming the exclusions will no longer be solely upon the taxpayer and the preparer, tax software, or tax professionals. While no analysis is yet available, I suspect that many people missed at least part of the 2025 tax savings.
These new provisions are taxpayer-friendly and should not be overlooked, even for last year. Go back and take a look at your 2025 Tax Return to be sure. You just might save some “extra” cash.
Last week, we covered the propensity of Americans to set Tax Planning on the shelf after April 15, only to dust it off and start over in about 50 weeks. Doing so can be costly, as these taxpayers may be ignoring opportunities to save on taxes for the next cycle. Retirement Planning can also be slighted by ignoring Tax Code changes and contribution increases available to taxpayers.
Tax Planning in the modern era goes back to the 1990s, with the passage of the Taxpayer Relief Act of 1997. In my opinion, Congress never received sufficient credit for this law, which granted taxpayers (and savers) opportunities to enhance our financial futures. It was in the 1997 Act that the Roth IRA was created, ushering in an era of tax-free growth and income.
Additionally, in the 1997 Act, qualified sellers were treated to an exemption from gains realized on sales of primary residences, up to $250,000 for singles and $500,000 for married couples. In our day jobs as financial advisors, we have suggested that most Members of Congress likely failed to read the Bill before signing on, as most of them would never have agreed to such a taxpayer-friendly provision.
Following the 1997 Act, every few years, Congress produced significant Tax Code changes, mostly favorable to taxpayers. This past week, Americans filed their Tax Returns (except for those who chose the available Automatic Extension) in the most favorable taxation environment I can remember. According to the IRS, tax refunds are the largest in recent memory, reflecting policy changes codified by recent legislation.
Speaking of refunds, taxpayers who receive large refunds should be triggered to engage in immediate Tax Planning. While fun to receive (and to spend), large refunds are indicative of sub-optimal preparation. The most obvious (and frequently discussed) improvement in the financial lives of the high refund group is to stop making interest-free loans to Uncle Sam. While Money Market interest rates are down from last year, they remain significant, and the interest income should be realized by the taxpayer, not by Uncle Sam.
Other possibilities can be even more financially rewarding. Increased limits for contributions to Qualified Retirement Accounts enable taxpayers to reduce current taxes and increase eventual retirement income. Debt reduction is also a money saver, and can be enhanced by reducing paycheck tax withholding to accelerate monthly debt payments from stronger cash flow.
Decreasing payroll withholding (or reducing Form 1040-ES Quarterly Tax Deposits) leads to smaller refunds, which isn’t as much fun, but financially, those lesser refunds rock. Don’t delay Tax Planning if you are serious about retirement income.
Americans’ annual day of reckoning is here. Taxes, some say, represent the cost of living in a free society. Decades ago, as a young adult, I remember long lines at the U.S. Post Office in the waning hours of April 15, as taxpayers rushed to get a timely postmark on their Individual Income Tax Returns.
In some areas, temporary drop boxes were made available, which would be closed at midnight, at which time postal workers took the envelopes inside and postmarked them by hand with the April 15th date of arrival. These days, we mostly perform those functions on home computers, and let the computers’ operating systems acknowledge the delivery date over the Internet.
Americans fear the Internal Revenue Service (IRS) more than any other branch of government, and with good reason. Non-compliance with the 70,000+ page Tax Code leviathan leads to economic and social penalties. Knowing all the rules is virtually impossible, but the tax due date is clear.
Too many Americans perform their annual filing ritual in a last-minute (and often haphazard manner), and then forget all about taxes for nearly 12 full months. Many taxpayers “leave money on the table” due to a lack of attention.
The Tax Code is tweaked by Congress and the IRS so often that it averages out to about once every day. Significant changes are much less frequent, and in recent years have been largely favorable to taxpayers. Massive overhauls of the Tax Code include SECURE 1.0 and SECURE 2.0, as well as the One Big Beautiful Bill Act (OBBBA), also known as the Working Families Tax Cut Act. Taken together, most Americans have been granted tax reductions and opportunities for improved retirement savings.
Tax planning can save significant sums of hard-earned dollars, but most taxpayers don’t even know where to begin. Many taxpayers turn to their tax preparers for suggestions and receive mostly good advice. But preparers are not necessarily involved with the totality of their clients’ business and financial situations. Clients of Certified Financial Planners® (CFPs®) are often better served with Comprehensive Tax Planning (remember that we are not qualified tax preparers nor tax advisors, so we work with clients’ preparers).
Congress is well aware that they have been negligent on fiscal policy, resulting in a National Debt in excess of $39 Trillion (12 zeros). Despite this macroeconomic problem, Congress has long encouraged individual responsibility through tax-advantaged saving opportunities.
Taxes are here to stay, and failure to prepare for your future is unforgivable in the current economic environment. Excellent planning is readily available in conjunction with qualified financial advisors. We suggest a CFP® doing business as a Registered Investment Advisor (RIA).
From its low-profile introduction in 1997, the Roth IRA has become a behemoth among Americans’ savings and investment vehicles. Americans have more than $2 Trillion (12 zeroes) at the end of 2024 invested in Roth IRAs. Along the way, the Roth has added a cousin in the Roth 401(k). While not for everyone, the Roth concept has given a boost to savers in many situations.
Americans need to be responsible for their own economic futures. Sure, there is Social Security and Medicare, but try living on that package, and you’ll be disappointed and miserable. Social Security has never been able to support a decent retirement lifestyle, and was not designed for that purpose. Medicare doesn’t pay all your medical expenses, either. Everyone has a personal responsibility to supplement social program benefits with their own resources.
Opening a Roth IRA is easy, but first, you must have Earned Income in the year of the contribution. Earned Income consists only of money you receive for work, including wages, salaries, tips, commissions, bonuses, and net earnings from self-employment. Without Earned Income, no IRA contributions are allowed. If you do qualify but have not yet opened a Roth IRA, there are valid reasons for doing so, sooner rather than later.
Aside from offering tax-free growth and eventually tax-free income, Roth benefits are many and varied. Early withdrawals are tax-free for certain specific purposes, including first-time home purchases, disability, qualified higher education expenses, and several others. Starting the Roth IRA early allows your investment time to grow, eventually providing more funds for any of the exceptions, as well as for later retirement income.
Maximum flexibility and tax savings are available to Roth IRA owners once the account has been opened and funded (even with a small dollar amount) for at least 5 years. One year is credited for every calendar year in which the account holds contributed and/or earned dollars.
All contributed funds in a Roth IRA are available to the account owner at any time, for any reason. Those funds were already taxed prior to being contributed, and may be removed tax-free and without penalty.
Earnings and growth become available totally tax-free when the 5-year period has been reached, and the account owner has reached 59-1/2. Roth earnings and growth withdrawn from the account by someone under age 59-1/2 are subject to a 10% early withdrawal penalty. The above-mentioned exceptions to the penalty do apply to these qualified withdrawals.
For almost every saver, the benefits of Roth IRA ownership are best realized by reaching the 5-year period. Start early and get that clock ticking.
Becoming an employer is not everyone’s dream, but Americans are commonly entrepreneurial in spirit. Starting a business is part of both our capitalistic economic system, as well as our individual dreams. Many business startups fail, but an incredible number succeed, at least to some extent. Everyone starts small, but most successful startups eventually are able to hire people to handle daily chores in a growing business.
Becoming an employer changes a person in ways probably unanticipated prior to hiring anyone. Suddenly, a grave responsibility burdens the newly minted employer. While there are legal requirements for every new employer, there is also a moral calling and responsibility. The owner is suddenly charged with making payroll, and the financial weight of the new responsibility can be overwhelming. You can trust me, but ask any business owner how he or she feels about ongoing responsibility for employees’ paychecks.
Recognizing that a majority of Americans have never experienced the responsibility of making payroll, events of the past few weeks have presented a golden opportunity for me to discuss the concept. We hear frequent complaints from political candidates that their opponent has never signed the front of a paycheck. To many of us, that is a profound statement.
Sacrosanct is the word that comes to mind regarding making payroll. Business owners have a legal responsibility, but also a moral and ethical duty, to pay employees on time, and in the correct amount, every week.
When occasional bad times hit a business (inevitable for nearly every enterprise, large or small), the owner often must scramble to make payroll. The Number One responsibility of a business owner is to live up to the promise of compensating employees. If that means borrowing money personally, mortgaging the owner’s house, taking early withdrawals from Qualified Retirement Accounts, foregoing personal bill payments, or whatever, you do it.
Having a personal multi-decade family history of making payrolls, it is a frequent topic in our daily lives and business dealings. So, what’s triggering this conversation at this particular moment? Congress has “evolved” into an entity that appears to have overcome any sense of responsibility for making payroll for their hundreds of thousands of Federal Government employees. (Note that Congress gets paid no matter what, under a separate law.)
Even people who have never signed the front of a paycheck know what it would be like to not receive their earned compensation in a timely manner. Not providing government employees what they depend on, and are due, is unforgivable.