How to Use a Trust in Medicaid Planning
With careful Medicaid planning, you may be able to preserve some of your estate for your children or other heirs while meetin...
Read moreYou’ve worked tirelessly to build your nest egg during your working years, and now, as you approach or enter retirement, the “golden years” may not appear as carefree as they once did.
People are living longer, inflation is stretching every dollar further than expected, and the markets are anything but predictable. Add in the rising cost of health care and the disappearance of traditional pensions, and even well-prepared retirees are asking: Will my savings last?
Local Elder Law Attorneys in Your City
At the same time, the Internal Revenue Service (IRS) requires you to begin withdrawing from your traditional Individual Retirement Account (IRA) whether you need the income or not. These Required Minimum Distributions (RMDs) can bump you into a higher tax bracket, reduce the compounding power of your investments, and force tough financial decisions at exactly the wrong time.
For those looking for more control, predictability, and peace of mind, annuities within an IRA — particularly tools like the Qualified Longevity Annuity Contract (QLAC) — offer a way to manage income, reduce risk, and preserve the dream of a comfortable retirement.
One of the major challenges for traditional IRA owners approaching retirement is how to withdraw funds without triggering unintended — and undesired — tax consequences. RMDs are central to that issue.
When Congress first authorized the IRA in 1974, the idea was simple: let workers defer taxes on income they’d use later in retirement. But the IRS wasn’t going to let those tax breaks last forever. RMDs were baked into the deal from the beginning.
Originally, IRA holders were required to begin withdrawals at age 70½. The SECURE Act (2019) and SECURE 2.0 (2022) raised the RMD age as follows:
On paper, these delayed start dates appear to give retirees more flexibility. But for retirees who don’t need the income right away, they can create complications:
Fortunately, Congress didn’t leave retirees without options. Recognizing that more Americans risk outliving their savings, lawmakers introduced a carve-out strategy in the form of QLACs.
Created by the U.S. Treasury in 2014 and expanded under SECURE 2.0, a QLAC is a special type of deferred income annuity purchased inside a traditional IRA or 401(k).
Unlike most IRA investments, money placed in a QLAC is excluded from your RMD calculation, potentially for more than a decade. Here’s a simplified look at how it works:
For some retirees, QLACs are a game changer, offering a way to defer taxes, postpone income until it’s truly needed, and create a hedge against outliving their assets.
In addition, because the value of the annuity contract is excluded from the plan balance used to determine RMDs, if you die before receiving the full value of your QLAC, the unpaid portion of your original investment can be returned to your IRA and passed to your heirs.
But QLACs are not for everyone; they’re illiquid and irrevocable. If you don’t live long enough to collect payments, your heirs may receive little or nothing, unless you’ve selected optional features like return of premium or joint-life coverage. And while SECURE 2.0 introduced more flexibility, the rules remain complex, and the contracts are not easily undone.
Nonetheless, for retirees in strong health, with sizable IRA balances, and a desire to manage long-term income while minimizing RMD exposure, the QLAC stands out as a rare solution: IRS-approved, actuarially sound, and purpose-built to address longevity risk.
An annuity is essentially a contract with an insurance company where you exchange a sum of money for guaranteed payments, typically for life or a specified period.
Annuities can be purchased both outside and within an IRA. When used inside an IRA, they can give retirees the benefits discussed above: helping secure a predictable income stream, potentially mitigating longevity risk, and, when structured as a QLAC, an RMD workaround. Annuities can also be part of long-term care planning.
It’s important to understand that when a “standard” annuity (i.e., one not designated as a QLAC) is held within an IRA, the primary benefit isn’t added tax deferral. Your IRA already does that. Instead, the value comes from layering the annuity’s unique features, such as income guarantees or principal protection, onto an already tax-advantaged retirement account. This combination can be particularly appealing to retirees who want stability, simplicity, and protection from market volatility.
Several other types of annuities can be used strategically within IRAs for retirement planning:
Each type of annuity carries its own tradeoffs in terms of liquidity, fees, growth potential, and guarantees. But for retirees concerned with income reliability, longevity protection, or estate planning goals, annuities can be part of a broader retirement income strategy.
Annuity Type | When Income Begins | RMD Treatment | Primary Use | Legacy Considerations |
---|---|---|---|---|
QLAC (Qualified Longevity Annuity Contract) | Age 80–85 (chosen by contract) | Excluded from RMDs up to $200,000 of IRA/401(k) funds | Defer income and taxes; hedge longevity | Optional return-of-premium or joint life options |
SPIA (Immediate Annuity) | Within 12 months of purchase | Included in RMDs; income generally satisfies RMDs | Create immediate, predictable income | May offer period-certain or refund options |
DIA (Deferred Income Annuit) | Future date (not QLAC-qualified) | Included in RMDs unless QLAC-qualified | Secure income starting later in retirement | Options vary; not always legacy-friendly |
Fixed Indexed Annuity (FIA) | Depends on contract terms | Included in RMDs | Principal protection + index-linked growth | May include death benefit or guaranteed minimum |
Variable Annuity (VA) | Flexible; can add income rider | Included in RMDs | Market exposure with optional income rider | Can include enhanced death benefit riders |
Annuities can play a role in retirement income strategies, but their complexities extend into estate planning and should not be overlooked from a legacy perspective. Key considerations include:
Understanding these factors helps ensure your retirement income strategy not only matches your personal retirement goals but also fits into your long-term plans for your beneficiaries.
Annuities are one way to manage retirement income and longevity risk. For more flexibility, liquidity, or growth potential, other options can work either alongside or instead of annuities. Some of them are:
Each strategy has its own trade-offs in terms of taxes, risk, flexibility, and legacy goals. The right mix depends on your personal situation and preferences and should be coordinated in conjunction with your financial and estate plans. For professional advice about the planning strategies that are right for you and your family, reach out to a local attorney.
With careful Medicaid planning, you may be able to preserve some of your estate for your children or other heirs while meetin...
Read moreInheriting an IRA may seem like a good thing, but there can be tax consequences if you aren't careful. If you inherit an IRA,...
Read moreUnauthorized withdrawals from IRA funds before the age of 59½ are typically subject to taxes and penalties, but it'...
Read moreIn addition to nursing home care, Medicaid may cover home care and some care in an assisted living facility. Coverage in your state may depend on waivers of federal rules.
READ MORETo be eligible for Medicaid long-term care, recipients must have limited incomes and no more than $2,000 (in most states). Special rules apply for the home and other assets.
READ MORESpouses of Medicaid nursing home residents have special protections to keep them from becoming impoverished.
READ MOREIn addition to nursing home care, Medicaid may cover home care and some care in an assisted living facility. Coverage in your state may depend on waivers of federal rules.
READ MORETo be eligible for Medicaid long-term care, recipients must have limited incomes and no more than $2,000 (in most states). Special rules apply for the home and other assets.
READ MORESpouses of Medicaid nursing home residents have special protections to keep them from becoming impoverished.
READ MORECareful planning for potentially devastating long-term care costs can help protect your estate, whether for your spouse or for your children.
READ MOREIf steps aren't taken to protect the Medicaid recipient's house from the state’s attempts to recover benefits paid, the house may need to be sold.
READ MOREThere are ways to handle excess income or assets and still qualify for Medicaid long-term care, and programs that deliver care at home rather than in a nursing home.
READ MORECareful planning for potentially devastating long-term care costs can help protect your estate, whether for your spouse or for your children.
READ MOREIf steps aren't taken to protect the Medicaid recipient's house from the state’s attempts to recover benefits paid, the house may need to be sold.
READ MOREThere are ways to handle excess income or assets and still qualify for Medicaid long-term care, and programs that deliver care at home rather than in a nursing home.
READ MOREMost states have laws on the books making adult children responsible if their parents can't afford to take care of themselves.
READ MOREApplying for Medicaid is a highly technical and complex process, and bad advice can actually make it more difficult to qualify for benefits.
READ MOREMedicare's coverage of nursing home care is quite limited. For those who can afford it and who can qualify for coverage, long-term care insurance is the best alternative to Medicaid.
READ MOREMost states have laws on the books making adult children responsible if their parents can't afford to take care of themselves.
READ MOREApplying for Medicaid is a highly technical and complex process, and bad advice can actually make it more difficult to qualify for benefits.
READ MOREMedicare's coverage of nursing home care is quite limited. For those who can afford it and who can qualify for coverage, long-term care insurance is the best alternative to Medicaid.
READ MOREDistinguish the key concepts in estate planning, including the will, the trust, probate, the power of attorney, and how to avoid estate taxes.
READ MORELearn about grandparents’ visitation rights and how to avoid tax and public benefit issues when making gifts to grandchildren.
READ MOREUnderstand when and how a court appoints a guardian or conservator for an adult who becomes incapacitated, and how to avoid guardianship.
READ MOREWe need to plan for the possibility that we will become unable to make our own medical decisions. This may take the form of a health care proxy, a medical directive, a living will, or a combination of these.
READ MOREDistinguish the key concepts in estate planning, including the will, the trust, probate, the power of attorney, and how to avoid estate taxes.
READ MORELearn about grandparents’ visitation rights and how to avoid tax and public benefit issues when making gifts to grandchildren.
READ MOREUnderstand when and how a court appoints a guardian or conservator for an adult who becomes incapacitated, and how to avoid guardianship.
READ MOREWe need to plan for the possibility that we will become unable to make our own medical decisions. This may take the form of a health care proxy, a medical directive, a living will, or a combination of these.
READ MOREUnderstand the ins and outs of insurance to cover the high cost of nursing home care, including when to buy it, how much to buy, and which spouse should get the coverage.
READ MORELearn who qualifies for Medicare, what the program covers, all about Medicare Advantage, and how to supplement Medicare’s coverage.
READ MOREWe explain the five phases of retirement planning, the difference between a 401(k) and an IRA, types of investments, asset diversification, the required minimum distribution rules, and more.
READ MOREFind out how to choose a nursing home or assisted living facility, when to fight a discharge, the rights of nursing home residents, all about reverse mortgages, and more.
READ MOREUnderstand the ins and outs of insurance to cover the high cost of nursing home care, including when to buy it, how much to buy, and which spouse should get the coverage.
READ MOREWe explain the five phases of retirement planning, the difference between a 401(k) and an IRA, types of investments, asset diversification, the required minimum distribution rules, and more.
READ MOREFind out how to choose a nursing home or assisted living facility, when to fight a discharge, the rights of nursing home residents, all about reverse mortgages, and more.
READ MOREGet a solid grounding in Social Security, including who is eligible, how to apply, spousal benefits, the taxation of benefits, how work affects payments, and SSDI and SSI.
READ MORELearn how a special needs trust can preserve assets for a person with disabilities without jeopardizing Medicaid and SSI, and how to plan for when caregivers are gone.
READ MOREExplore benefits for older veterans, including the VA’s disability pension benefit, aid and attendance, and long-term care coverage for veterans and surviving spouses.
READ MOREGet a solid grounding in Social Security, including who is eligible, how to apply, spousal benefits, the taxation of benefits, how work affects payments, and SSDI and SSI.
READ MORELearn how a special needs trust can preserve assets for a person with disabilities without jeopardizing Medicaid and SSI, and how to plan for when caregivers are gone.
READ MOREExplore benefits for older veterans, including the VA’s disability pension benefit, aid and attendance, and long-term care coverage for veterans and surviving spouses.
READ MORE