A Qualified Longevity Annuity Contract (QLAC) is a specialized insurance product designed to protect retirees from longevity risk—the possibility of outliving their retirement savings. It allows individuals to allocate a portion of their qualified retirement plan assets, such as in an IRA or 401(k), to purchase an annuity that starts paying a steady income at an advanced age, typically between 70 and 85. Introduced by the IRS in 2014, QLACs provide a strategic way to reduce the amount counted for required minimum distribution (RMD) calculations, lowering taxable withdrawals and ensuring a more predictable income stream later in life.
The Purpose Behind QLACs
The requirement to begin RMDs from traditional IRAs and 401(k) plans starts at age 73 as of 2024, compelling retirees to withdraw taxable amounts annually whether they need the funds or not. This can accelerate depletion of retirement savings and increase tax liabilities. The QLAC mechanism addresses this issue by allowing retirees to exclude the invested amount from RMD calculations until the annuity payments begin, typically at a later age.
How Does a QLAC Work?
- A retiree uses eligible funds from a qualified retirement account to purchase a QLAC from an insurance company.
- Up to $145,000 or 25% of total qualified account balances (whichever is less) can be allocated to a QLAC as of 2024.
- The invested amount in the QLAC is excluded from the RMD base calculation, thereby reducing RMD withdrawals and associated taxes.
- Payments start at a chosen age between 70 and 85, providing fixed, predictable income for life or a set period.
Think of a QLAC as a deferred income source within your retirement portfolio, designed to budget income for your later years, helping to avoid running out of money if you live longer than expected.
Key Characteristics and Limits
| Feature | Details |
|---|---|
| Maximum Investment | Lesser of $145,000 or 25% of your qualified retirement account balances (2024 limits) |
| Purchase Location | Must be within a qualified retirement plan or IRA |
| Payment Start Age | Between 70 and 85 years |
| Payment Type | Single or joint lifetime income payments |
| RMD Exclusion | QLAC investment excluded from RMD calculations until payments begin |
Practical Example
Consider Jane, who has $500,000 in her IRA at age 72. If she does not buy a QLAC, her RMD will be calculated on the full amount. By purchasing a QLAC with $100,000 of her IRA funds, that portion is excluded from her RMD base. As a result, her RMD is recalculated based on $400,000 until her QLAC payments start, which reduces her immediate taxable income and taxes owed.
Who Should Consider a QLAC?
- Individuals concerned about outliving their retirement savings.
- Retirees seeking to manage and potentially lower their taxable RMD amounts.
- Those desiring a guaranteed lifetime income stream to complement Social Security and pensions.
- Investors willing to commit a portion of their savings to long-term income rather than immediate access.
Strategic Tips for Using QLACs
- Assess your cash flow needs carefully before committing funds to a QLAC.
- Compare products and insurers focusing on financial strength and contract features.
- Consider inflation-protected QLAC options to maintain purchasing power over time.
- Coordinate QLAC income with other retirement income sources like Social Security, pensions, and investments.
- Stay updated on IRS rules regarding RMDs and contribution limits which can change periodically.
Common Misunderstandings
- “You lose access to funds permanently”: The funds buy an annuity contract, so while liquidity is reduced, the trade-off is guaranteed income later.
- “QLACs are only for the wealthy”: Because they reduce RMD amounts on qualified accounts, QLACs benefit a broad spectrum of retirees.
- “Payments start immediately”: QLAC payments begin only upon reaching the age you select between 70 and 85.
- “QLACs remove all retirement risks”: They mitigate longevity risk but don’t protect against inflation or market volatility.
Frequently Asked Questions
Q: Can QLACs be bought with after-tax or Roth IRA funds?
A: No, QLACs must be purchased with pre-tax or tax-deferred funds inside traditional IRAs or qualified plans. They are not allowed in Roth IRAs, which do not have RMD requirements.
Q: What if I die before payments start?
A: Most QLAC contracts offer options like death benefits or survivor incomes, but terms vary by insurer.
Q: Is there a minimum age to buy a QLAC?
A: No minimum purchase age, but payments cannot start before age 70.
Summary
A Qualified Longevity Annuity Contract is a valuable retirement planning tool to manage longevity risk by deferring income to later years and reducing early taxable withdrawals. When integrated carefully with other retirement income strategies, QLACs can strengthen your financial security in advanced age.
For more details on related topics, see our Required Minimum Distribution (RMD) article and explore retirement income planning strategies in our Retirement Income Strategies guide.
Authoritative Resources
- IRS on QLACs: https://www.irs.gov/retirement-plans/qualified-longevity-annuity-contracts-qlac
- Consumer Financial Protection Bureau: https://www.consumerfinance.gov/ask-cfpb/what-is-a-qualified-longevity-annuity-contract-qlac-en-249/
(Links verified active as of June 2024)
