RMD Strategy No. 3: Carve Outs
About five years ago, a new option known as the qualified longevity annuity contract, or QLAC, arrived. You can carve out up to $130,000 or 25% of your retirement account balance, whichever is less, and invest that money in this special type of deferred income annuity.
Compared with an immediate annuity, a QLAC requires a smaller upfront investment for larger payouts that start years later. The money invested in the QLAC is no longer included in the IRA balance and thus is not subject to RMDs. Payments from the QLAC will be taxable, but because it is longevity insurance, those payments won’t kick in until about age 85.
Another carve-out strategy applies to 401(k)s. If your 401(k) holds company stock, you could take advantage of a tax-saving opportunity known as net unrealized appreciation, says Russell. You roll all the money out of the 401(k) to a traditional IRA, but split off the employer stock and move it to a taxable account, paying ordinary income tax on the cost basis of the employer stock.
You’ll still have RMDs from the traditional IRA, but they will be lower since you removed the company stock from the mix. And any profit from selling the shares in the taxable account now qualifies for lower long-term capital-gains tax rates.
