There are not many issues that receive bipartisan government support these days and yet easing the burden of saving for retirement continues to be one of them. In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act flew through the House and Senate. In December of 2022, an upgraded version dubbed SECURE 2.0 likewise was quickly passed and signed into law.
Much of this new legislation is geared toward making it easier for employees to enroll in employer-maintained retirement plans. Changes include bumping the age at which you need to start taking required minimum distributions (RMDs) to 73 in 2023 and 75 in 2033, decreasing the penalties incurred for failing to take RMDs, and removing RMDs altogether from Roth accounts in 2024, among numerous other beneficial updates.
In addition, SECURE 2.0 introduces important changes to the funding rules of Qualified Longevity Annuity Contracts (QLACs) bought in an IRA or other qualified plan. These changes are of particular interest to elder law attorneys or anyone invested in proactively planning for long-term care expenses (which, frankly, should be everyone).
What is a QLAC and Why Do SECURE 2.0’s Changes Matter?
A QLAC is an annuity purchased from an insurance company using assets stored in your IRA. Prior to SECURE 2.0, premium caps on QLACs were relatively low, limiting their usefulness. It used to be that the maximum premium for a QLAC could not exceed the lesser of 25% of the account balance or $125,000. Now, the percentage limitation has been removed and the maximum premium has been increased to $200,000. This makes a QLAC a much more effective retirement planning tool.
How Does a QLAC Help Me Save for Retirement?
QLACs work in tandem with many of the other retirement saving tools enhanced by SECURE 2.0.
When you purchase a QLAC you can elect to defer payments up until the month after you turn 85 years old. QLACs also help lower your RMDs as they are not included in the calculation that determines how much you need to withdraw from your qualified retirement savings account. Lastly, QLACs could be viewed as Medicaid Compliant Annuities (depending on your state) which means they are powerful tools for ensuring you qualify for long-term care coverage when you need it.
Taken altogether, SECURE 2.0 is a gift that significantly enhances Americans’ ability to save for retirement and protect their assets from the often crippling cost of long-term care.