What is a Qualified Longevity Annuity Contract (QLAC)?

Shawn Plummer

CEO, The Annuity Expert

A Qualified Longevity Annuity Contract (QLAC) is a deferred income annuity that allows traditional IRA owners and defined contribution plan participants to ignore the QLAC funds in those accounts when calculating their Required Minimum Distributions (RMDs).

As soon as you turn 72 years old, you have to take a required minimum distribution from all qualified retirement accounts each year so the IRS can collect ordinary income taxes on those tax-deferred savings.

Some retirees might not want to touch their qualified retirement accounts at age 72 because they don’t need the money at that time. Instead, the retiree might want to save those qualified retirement accounts for future retirement expenses later, such as health care and elder care expenses. This is where the Qualified Longevity Annuity Contract comes into place.

In July 2014, the United States Department of the Treasury and the Internal Revenue Service (IRS) updated the RMD rules to provide more flexibility on your pre-tax dollars. In addition, in 2020, the RMD age was pushed back from age 70.5 to age 72 with The Secure Act.

Now retirees can defer a portion of the mandatory income withdrawals from qualified retirement accounts until age 85, which helps clients address the risk of running out of money.

How does a QLAC work?

This special type of deferred annuity provides a retiree a guaranteed income stream in the future in exchange for a lump sum of money upfront. The income start date is pre-determined when the contract is issued. Once the income start date has arrived, the stream of income will start. The monthly paychecks will continue to pay as long as you (or your spouse) are alive.

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A Qualified Longevity Annuity Contract purchased today can provide fixed income beginning on any future date consistent with the contract, but no later than age 85. The longer the annuitant waits, the larger the income payment amount.

Your annuity provider will need to submit a 1098-Q form to the Internal Revenue Service to report the status of the deferred annuity as a Qualified Longevity Annuity Contract.

Why consider a Qualified Longevity Annuity Contract?

  • No other qualified retirement plan allows a person to defer the start of retirement income payments to as late as age 85.
  • The QLAC is the only way to defer RMDs past age 72.

Limitations

Of course, there’s going to be a dollar limitation in any tax savings. An individual can spend up to 25% or $135,000 (whichever is less) of their qualified retirement savings account (IRA, 401K, 403b, etc.) on the annuity purchase via a single premium. If you’re a married couple, you both can spend up to $260,000 on QLAC products.

Payout options

  • Single Life Only: This lifetime annuity income option offers a guaranteed, lifelong income with the highest payout rate based on life expectancy. There is no death benefit.
  • Joint Life Only: This lifetime annuity income option offers a guaranteed, lifelong income for both the annuity owner and spouse (two lives) based on life expectancy. Also known as a joint payout. There is no death benefit after the two insured pass away.
  • Lifetime Income with Cash Refund: This life annuity income option offers a guaranteed, lifelong income. If the owner happens to die before the initial investment is completely paid out, the listed beneficiaries would receive a cash refund (lump sum) of the remaining initial premium.

Related Article: What is a Qualified Annuity?

How Do Longevity Annuities Compare?

Variable
Annuity
Fixed Index
Annuity
Fixed
Annuity
Immediate
Annuity
QLAC
Principal ProtectionNoYesYesYesYes
Access To PrincipalYesYesYesNoNo
Control Over MoneyYesYesYesNoNo
Tax-Deferred GrowthYesYesYesNoNo
Guaranteed GrowthNoYesYesNoNo
Guaranteed IncomeYesYesYesYesYes
Inflation ProtectionYesYesNoYesYes
Death BenefitYesYesYesYes/NoYes/No
Long-Term Care HelpYesYesYesNoNo

Conclusion

When you receive your QLAC contract, carefully read through and review it. Be sure every feature is what you understood your retirement plan would be. For example, there are disclosures, statements of understanding, or a prospectus to understand better what you have invested in.

If you find yourself worried or feel that you haven’t purchased what you understood, there is always a freelook period which gives you a set number of days (usually 10 to 30 days) to change your mind about buying an annuity after you receive it. If you decide during the free look period that you don’t want the annuity, you can return the contract.

Frequently Asked Questions

What is a Qualified longevity annuity contract (QLAC)?

A QLAC or qualified longevity annuity contract is an income annuity that is purchased under an IRA or a qualifying employer-sponsored retirement plan and can start payments later than age 72 but no later than age 85. The funds allocated to QLACs may be excluded from Required Minimum Distributions (RMD) calculations after age 72.

How does a QLAC work?

A Qualified Longevity Annuity Contract purchased today can provide income beginning on any future date consistent with the contract, but no later than age 85. A QLAC must be a deferred income annuity (DIA), meaning that payments begin more than a year after purchase. The time between your QLAC purchase and the date your income payments begin is referred to as the deferral period. Payments under many QLACs may be deferred for five, 10, 20, or more years.

Why would I buy a QLAC with my IRA?

A QLAC purchased today can provide income beginning on any future date consistent with the contract but no later than age 85. A Qualified Longevity Annuity Contract must be a deferred income annuity (DIA), meaning that payments begin more than a year after purchase. The time between your QLAC purchase and the date your income payments begin is referred to as the deferral period. Payments under many QLACs may be deferred for five, 10, 20, or more years.

How does the length of the deferral period affect the cost of the QLAC?

The longer you wait to begin income payments, the higher your income payments can be for the same amount of money. The difference in cost is based on life expectancy and the length of time between the date of purchase and the date payments begin. Remember that with a Qualified Longevity Annuity Contract, as with any deferred income annuity, your premium is permanently converted to a guaranteed income stream that can last for your lifetime.

Is there a minimum purchase age restriction?

No.

Is there a limit to how much money I can use to purchase an IRA QLAC?

Premiums are limited to the lesser of 25% of aggregated IRA account values or a dollar limit of $135,000 in 2020, subject to IRS cost-of-living adjustments in future years. The dollar limit applies across all plans and IRAs collectively, while the percentage limit applies to plans on a per plan basis and to IRAs on an aggregate basis. If purchases exceed premium limits, corrections must be made to avoid the loss of QLAC status as of the date excess premiums are paid and result in tax consequences.

What account value is the 25% IRA limit based on?

The 25% limit is based on your aggregated traditional IRA account balance as of the prior December 31st, with fewer premiums previously paid to purchase other IRA QLACs.

Are Roth IRAs or inherited IRAs eligible to be classified as a QLAC?

No.

If I die before my selected payment start date, will my heirs lose the premium I paid for the QLAC?

An owner can select from two pre-commencement death benefit options. The return-of-premium (ROP) option allows the premium to be paid to your beneficiary(ies) in the event you die prior to the income start date. Selecting this option increases the cost of the Qualified Longevity Annuity Contract and decreases the amount of deferred income payment. The second option offers no death benefit but provides higher income payments. However, if you die prior to the income start date, no death benefit or income payments will ever be paid, and your QLAC will terminate.

What payment types can be selected with a QLAC?

The annuity payout options are limited to a single or joint life only and single or joint life with a cash refund.

Are annual payment increase options available?

Some QLAC payment options have a Cost of Living Adjustment (COLA) to help with inflation adjustment.

Can my QLAC provide for annuity payments to my spouse if I die first after income payments begin?

Some QLAC offer joint and survivor and joint and contingent payment options with the requirement that the joint annuitant is a spouse.

If the owner dies prior to the income start date on a joint-life QLAC, when must the joint annuitant start income payments?

The spousal joint annuitant must start income no later than the original income start date.

Can a QLAC become a non-QLAC contract by changing the income start date to a date before the owner is 72?

A Qualified Longevity Annuity Contract that provides the option to change the income start date does not disqualify the contract from being a QLAC even if the owner exercises the option and begins receiving income prior to 72.

If the owner dies before income payments begin under the QLAC and a death benefit is payable to a beneficiary, is that death benefit eligible to be rolled over to another plan or to traditional IRAs?

If the owner’s death occurs before the owner’s required beginning date, the proceeds should be eligible for rollover. If the owner’s death occurs after the RBD, then the death benefit payment is treated as an RMD and is not eligible for rollover. Similarly, if the surviving spouse’s death is after the RBD for the surviving spouse, then the death benefit payment is treated as an RMD and not eligible for rollover.

Is commutation permitted with QLAC contracts?

No. There is not a commutation benefit.

Can I access the funds inside the QLAC?

A Qualified Longevity Annuity Contract (QLAC) does not have any cash surrender value or commutation benefit.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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