Outside Economics

Final Regulations for Qualifying Longevity Annuity Contracts (QLACs)

Posted by Wendell Brock, MBA, ChFC on Thu, Sep 25, 2014

The Treasury Department released the final regulations for Qualifying Longevity Annuity Contracts (QLACs). QLACs, are a brand new type of fixed longevity annuity that is held in a retirement account that has special tax attributes. These new annuities offer a unique tool to help make sure you don't outlive your money. The QLAC rules, however, are a complicated mix of IRA rules and annuity rules, and you may need help in understanding their key provisions.

QLAC Slide Small

Typically, the age in which the required minimum distributions (RMDs) begin is age 70 ½. The new regulations have now made it easier to invest a portion of your retirement savings in annuities that won't pay benefits until age 85. Obviously this reduces the number of years for which you’ll likely receive an income stream, but it also helps to maximize the amount of income you can receive in later years for a given premium.

The Summary of Comments and Explanation of Revisions that was released with the Final Regulations offered the following: "For example, if at age 70 an employee used $100,000 of his or her account balance to purchase an annuity that will commence at age 85, the annuity could provide an annual income that is estimated to range between $26,000 and $42,000."

Here are some of the highlights of the QLAC Final Regulations:

  • You will be able to exclude the value of a QLAC from your RMD calculations, allowing you to keep a greater portion of your IRA (or other retirement account) intact longer.
  • Payments from QLACs will have to begin no later than the first day of the month after you turn 85.
  • You will be limited as to how much of your retirement savings you can invest in a QLAC. The limit will be the lesser of $125,000 or 25% of your applicable retirement account assets. The 25% limit will apply on an individual plan basis, except for IRAs, BUT the $125,000 is a cumulative limit for all QLACs in all retirement accounts. For IRAs, the 25% limit will apply to the prior year-end total of all IRAs (not including Roth IRAs).
  • The limits will apply separately to each spouse when each spouse has their own retirement accounts.
  • QLACs cannot be variable or equity-indexed annuity contracts, though insurance may offer contracts with cost-of-living adjustments.
  • QLACs cannot offer any cash surrender value. So if you buy one, just be sure you won’t be needing that lump-sum of money anytime soon!

At this point you may be wondering why the Treasury Department created QLACs. Prior to the establishment of QLACs, there were significant challenges to purchasing longevity annuities with your IRA money. The rules required that unless an annuity held within your IRA had been annuitized, its fair market value needed to be included in your prior year-end balance when calculating your IRA RMD. So, if you had non-annuitized IRA annuities in your IRA, this left you with an inconvenient choice to make after reaching the age at which RMDs begin. At that time, you needed to either:

  1. Begin taking distributions from your non-annuitized IRA annuities – reducing their potential future benefit, or
  2. Annuitize your annuities – which would obviously produce a lower income stream than if they were annuitized at a more advanced age, or
  3. “Make-up” the non-annuitized annuity’s RMD from your other IRA assets – drawing down those assets at an accelerated rate.

None of these options were particularly attractive and now, thanks to QLACs, you will no longer have to make such decisions – at least with respect to a portion of your retirement savings.

The final regulations limit the amount of money you can invest in a QLAC in two separate ways, a percentage limit and an overall limit. First, you may not invest more than 25% of your retirement account funds in a QLAC. For IRAs, the 25% limit is based on the total fair market of all your non-Roth IRAs, including SEP and SIMPLE IRAs, as of December 31 of the year prior to the year the QLAC is purchased. The fair market value of any QLAC held in an IRA will also be included in that total, even though it won’t be for RMD purposes.

The 25% limit is applied in a slightly different manner to 401(k)s and similar plans, so if you’re thinking about using plan money to purchase a QLAC, be sure to check on those specific rules.
In addition to the 25% limit described above, there is also a $125,000 overall limit on total QLAC purchases. When looked at in concert with the 25% limit, the $125,000 overall limit becomes a “lesser of” rule. In other words, you can invest no more than the lesser of 25% of your retirement funds or $125,000 in QLACs.

Perhaps the biggest difference between the proposed regulations of 2012 and the final regulations relate to the potential death benefit options. Initially, the only QLAC death benefit option was going to be an income stream paid out over the life of the beneficiary (the size and start date of the payments were to vary depending on whether the beneficiary was a spouse or non-spouse designated beneficiary). That’s still an option under the final regulations, but an additional return-of-premium option is also now possible.

These, of course, are the death benefit options allowed to be offered by a QLAC under the final regulations, but that doesn’t mean that every QLAC will do so. It’s likely that insurance companies will begin to introduce annuity products that meet QLAC specifications in the near future. If it sounds like a strategy that may make sense for you, give us a call we can provide you with a FREE evaluatation of your options.

Topics: treasury department, QLACs, Qualifying Longevity Annuity Contracts, RMDs

Swiss Gold Opportunity

Posted by Wendell Brock, MBA, ChFC on Thu, Sep 11, 2014

One of the very few remaining proper democracies in the world will vote on bringing the Swiss Gold back to Switzerland on November 30. In order to have a national referendum on an issue in Switzerland, 100,000 supporting signatures are required. The ‘Swiss Gold Iniative" already achieved this requirement in early 2013.

Swiss Franc gold coins1

Luzi Stamm, who is an influential member of parliament, representing the biggest Swiss party SVP (Swiss People’s Party) started this initiative with two other parliamentarians. A growing number of Swiss citizens have joined in the attempt to force the Swiss central bank to halt all sales of current gold reserves, repatriate all gold back home, and to back any further money printing with 20% of gold purchases- the three major points of the Swiss Gold Initiative. 

Of course, the politicians and bankers of Switzerland are squarely against this initiative as it greatly diminishes their hold on power and restricts their ability to continue to debase the Franc by freely printing money and manipulate the markets.

Most governments and central banks officially dislike gold because it reveals the decline in the value of paper money. Since 1913 when the Fed in the USA was founded, all major currencies, including the Swiss Franc, have lost between 97% and 99% of their value against gold.

Voltaire said in 1729: “Paper money eventually returns to its intrinsic value – ZERO.”

Swiss monetary policy used to be the soundest in the world, but in recent years Switzerland has joined other countries in abandoning a policy of sound money. Switzerland had 2,600 tons of gold in 1999 which was a significant amount in relation to the size of the country. At that time it was decided by the Swiss National Bank- not the people or parliament- to sell 50% of the holding. Most of this was sold at the low of the market just like in the UK.

A major result of this initiative against the central banks would be if they insist on printing massive amounts of money, as the Fed in America does, as the central bank of Europe does, then they are at the same time forced to buy a certain percentage of gold.

Of course we don’t know what the outcome will be, but Luzi believes that if Switzerland passes this initiative and takes the lead in backing their currency this will lead to a chain reaction in the central banks of other European nations, like Germany and Austria, to do the same. Perhaps the populations of those countries would also start to complain, “Why isn't our money backed with gold like Switzerland?” Perhaps this trend may eventually reach our shores here in America...

In some circles this is a real heated debate, should we or should we not use a gold standard to help stabilize our currency and control inflation. And yet at times our current system seems so easy to use, why complicate things? It’s what we grew up with. A gold standard is so long ago it is ancient history. Perhaps a gold standard would help us take our country back from the politicians and put the power back in the hands of the people? What do you think? Gold or no gold?

Topics: Gold, Switzerland, Gold Standard

The New Cold War

Posted by Wendell Brock, MBA, ChFC on Wed, Sep 03, 2014

Economic WarfareThe Economic Cold War or Financial Cold War has begun slowly over the past several years and the current administration has added fuel to the fire. China and Russia both know it would be extremely difficult to win a ground war against the United States, but a financial war? Maybe not so hard, with our excessive national debt and endless printing of money by the Federal Reserve, they have a real shot at giving the US a serious black eye and maybe even a few broken bones. How will they do this? By knocking out the dollar as the world’s reserve currency. Here is a sharp hit:

Beginning Last week, Russia’s started selling oil in both Rubles and Yuan, which have great ramifications to the United States. In a new announcement from the Russian business media source, Kommersant, Gazprom has conducted the first sale of oil in a currency other than the dollar, and will henceforth open their purchase window to accept both Rubles and Yuan for the exchange of oil and gas products.

Although this is not the first real transaction for oil done outside the petro-dollar, as this occurred covertly by Iran for gold during the days of economic sanctions, it is the first official global offering by a major oil producer and will likely bring an end to the solitary system of nations being forced to buy dollars first before buying oil from producers such as OPEC and Russia. According to the Kommersant,

“The Russian government and several of the country’s largest exporters have widely discussed the possibility of accepting payments in rubles for oil exports. Last week, Russia began to ship oil from the Novoportovskoye field to Europe by sea. Two oil tankers are expected to arrive in Europe in September. The payment for these shipments will be received in rubles.

Gazprom Neft will not only accept payments in rubles; subsequent transfers via the ESPO may be paid for in yuan, the newspaper reported. The change in currency was made because of the Western sanctions against Russia. As a protective measure, Russia decided to avoid making its payments in US dollars, which can be tracked and controlled by the United States government. - Ria Novosti”

Russia and China had already long been in the works to supply one another with oil, energy, and other trade goods outside the dollar through a historic energy agreement made in late May of this year. However, the irony in all of this is that the move to enlarge this method of payment for oil to accommodate global transactions was only accelerated because of U.S. imposed sanctions, which were done in an attempt to isolate Russia, and tear down their economy.

There is over $17 trillion in U.S. dollars afloat and in nations outside the U.S. kept on reserve for the primary purpose of buying oil and natural gas. As more and more countries migrate to the East and find it far more inexpensive and efficient to no longer use the dollar and SWIFT systems to supply their energy needs, then these dollars will soon come crashing back to American shores, and the inflation America has exported offshore for decades will come rudely back and suddenly hit U.S. consumers and our financial system.

Money manager Peter Schiff has foreseen the day when the US dollar no longer is the world's reserve currency. On this subject he has said, “I am already prepared, and what I am trying to prepare…for is the day when the dollar is no longer the reserve currency. . . . From an investor’s perspective, we are engaging Russia, not in another hot war, but in a financial cold war. That simply accelerates this process because I think that we are really unarmed to have this battle. America depends on countries like Russia hoarding dollars, accumulating dollar reserves, invoicing their customers in dollars and supplying products that we pay for with the dollars that we print. When we anger countries like Russia or other countries that may be sympathetic with Russia...(then we are) accelerating this day of reckoning.”

Schiff's insights on gold are worth contemplating. He contends that the main reason the price of gold is not much higher is not because the price is being suppressed, and maybe it is to some extent, but that it has more to do with financial ignorance. The vast majority of people who should be buying gold don’t understand that they need to be buying it now. 

“There is not a lot of understanding among the big players who manage trillions of dollars, and they are making foolish investments based on a lack of understanding of what’s happening. I think when it dawns on more investors exactly the predicament the Fed is in, that this recovery in the U.S. is a mirage. It is not real, and rather than the Fed ending QE and raising rates, it will be launching a whole new round of QE. It will be even bigger than the last one. When investors get their arms around that, they will be buying gold and they will be paying much higher prices. Then, nobody will be talking about manipulation because the price is going to be skyrocketing.”

The move made by Russia last week will have significant effects in the long term. The cold war we are now engaged in will not be easy to overcome, given the flawed financial policies the Fed has engaged in as well as the astronomical debt our government has laden us with. It is quickly becoming the perfect storm. What are you doing to prepare yourself for the times to come?

Topics: Gold, Economic Cold War, Financial Cold War, Oil


Wendell W. Brock, MBA, ChFC

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