I’m turning 73 soon and have over $1 million saved up. I’ve got a decent pension for half the year, and I work part-time as an alternative teacher a couple of days weekly. Plus, I earn around $10,000 annually from gig work (I document this on my Schedule C).
Honestly, I don’t need the money from my retirement plans unless something unexpected arises. But I understand I’ll have to start withdrawing. Life is uncertain—only death and taxes are guaranteed. I’m considering using $100,000 to invest in a QLAC to help lower my required minimum distributions (RMD). Is this a smart move? And what kind of financial advisor should I look for?
Let’s break this down. First off, it seems like your lease may not be fully tax-deductible. Only a fraction of it might qualify since you probably use it for other purposes apart from gig work. If your gig role resembles taxi driving, like with Uber or Lyft, you should receive a standard mileage deduction. So, you might want to revisit your taxes.
Then there’s the QLAC, or qualified longevity annuity contract. Some advisors say it’s addressing tax issues that might not even exist for you right now. Before diving into such a costly option, it’s essential to clarify your goals and determine if this aligns with your financial strategy. Generally, an effective tax plan aims to minimize your taxes over your lifetime. There are various strategies, including loss conversions, that could work better for you, according to experts.
QLAC can provide consistent income during retirement since it’s not influenced by market changes. Plus, it has potential tax benefits, like lowering your overall account balances, which may decrease your RMD and tax bracket. However, be aware that QLACs can be quite rigid and often irreversible. If you commit to one, it’s a long-term choice.
It appears you might not need those deferred income retirement accounts right now. Still, we’ve got to acknowledge the possibility of unexpected expenses down the road, such as for long-term care. If you invest in a QLAC, you’re essentially tying up your funds with the insurance company, which could limit your financial flexibility. Also, many pensions come with significant costs, so that’s something to keep in mind.
Having a certified financial planner (CFP) who can help you explore different scenarios can be beneficial. They can suggest ways to handle your withdrawal amounts each year, manage your tax brackets effectively, and think about strategies related to charitable donations if that’s something you’re considering. You might want someone who charges based on projects or hourly rates. Those rates can vary widely, but typically, project-based advisors charge between $1,500 and $7,500, while hourly rates range from $150 to $450.
Some financial professionals see QLACs as underutilized planning tools. Since interest rates stabilized in 2022, they’ve been recommending them more often. However, only a few insurers offer QLACs, limiting your options. Still, the existing contracts tend to be straightforward with similar payout structures.
Using QLAC to push back taxes might not be the best long-term strategy. You might end up with higher lifetime taxes, which isn’t exactly appealing. It’s somewhat similar to blowing up a balloon; the more you delay, the larger the eventual burden. This sentiment is echoed by many advisors.
Another consideration is the appropriate use of your funds. It might be wiser to invest in more versatile options, pay off your mortgage, or build an emergency fund. Leaving a legacy or contributing to charity could also be worthwhile; sometimes, those paths can be more fulfilling than focusing solely on taxes.
Finally, it’s essential to avoid commissioned insurance agents. They might push you toward QLAC because it benefits them financially. It’s tough to definitively say whether QLAC is right for you—often, it can be a poor fit.
