A QLAC annuity is a deferred income annuity that allows you to save money for retirement. It is also known as a longevity annuity because it pays out income starting later, usually when you reach age 85 or older. This guide will discuss the basics of QLAC annuities and how they can help you save for retirement.
What Is A QLAC?
A QLAC is an annuity contract that provides a guaranteed income to individuals during their retirement years. QLACs are specifically designed for individuals concerned about outliving their retirement savings. With a QLAC, individuals can pay a lump sum to an insurance company in exchange for guaranteed income for a set number of years or the rest of their lives.
What is A QLAC Annuity?
A QLAC (Qualified Longevity Annuity Contract) is an annuity designed to provide income during retirement. It is intended to help individuals plan for their financial needs later in life by providing a guaranteed stream of income that begins at a specified age, typically at or after age 85.
QLACs are unique because they are designed to be used with 401(k) and other defined contribution retirement plans. As a result, they can help individuals manage the risk of outliving their savings by providing a guaranteed source of income that cannot be outlived.
QLACs have certain tax advantages and are exempt from required minimum distribution (RMD) rules, which means that individuals do not need to start taking distributions from their QLAC until they reach the age specified in the contract. They can also reduce the required minimum distribution from other retirement accounts.
How does a QLAC work?
A QLAC provides a guaranteed income stream that begins at a specified age, typically at or after age 85—the individual purchases the QLAC with a lump sum or a series of payments. The insurance company that issues the QLAC guarantees a certain income level for the remainder of the individual’s life.
The income from a QLAC is usually paid out monthly or quarterly. It is often used to supplement other sources of retirement income, such as Social Security and pension payments.
QLACs are designed to help individuals manage the risk of outliving their savings by providing a guaranteed source of income that cannot be outlived. They can be combined with 401(k) and other defined contribution retirement plans and have certain tax advantages, including exempting required minimum distribution (RMD) rules. This means that individuals do not need to start taking distributions from their QLAC until they reach the age specified in the contract. They can also reduce the required minimum distribution from other retirement accounts.
Why consider a Qualified Longevity Annuity Contract?
There are several reasons why an individual might consider purchasing a Qualified Longevity Annuity Contract (QLAC). Some of these reasons include the following:
- To manage the risk of outliving their savings: A QLAC can provide a guaranteed stream of income for the remainder of the individual’s life, which can help to ensure that they have sufficient income to meet their financial needs later in life.
- To supplement other sources of retirement income: A QLAC can be used to supplement other sources of retirement income, such as Social Security and pension payments.
- To take advantage of tax benefits: QLACs have certain tax advantages, including being exempt from required minimum distribution (RMD) rules. This means that individuals do not need to start taking distributions from their QLAC until they reach the age specified in the contract. They can also reduce the required minimum distribution from other retirement accounts.
- To simplify retirement planning: A QLAC can be a valuable tool for individuals who want to simplify their retirement planning by setting aside a portion of their retirement savings to provide guaranteed income later in life.
Overall, a QLAC can be a good option for individuals who want to ensure that they have a stable source of income during retirement and are looking for ways to manage the risk of outliving their savings.
Limitations
There are a few limitations to consider when purchasing a Qualified Longevity Annuity Contract (QLAC):
- Limited flexibility: Once an individual has purchased a QLAC, they are generally committed to receiving the guaranteed income for the remainder of their life and do not have the option to change the contract terms or receive a lump sum payment.
- Early withdrawal restrictions: If an individual withdraws funds from a QLAC before the age specified in the contract, they may be subject to early withdrawal penalties.
- Limited options for beneficiaries: In some cases, the individual’s beneficiaries may not have the option to receive the remaining funds in a QLAC as a lump sum payment after the individual’s death.
- Potential for lost growth: Because funds in a QLAC are generally not invested in stocks or other growth-oriented investments, there is a potential for the individual to miss out on potential growth in their retirement savings.
Overall, it is essential for individuals to carefully consider these limitations before purchasing a QLAC and to consult with a financial professional to determine whether a QLAC is a suitable choice for their specific situation.
Qualified Longevity Annuity Contract Pros and Cons
Here are some of the pros and cons of a Qualified Longevity Annuity Contract (QLAC):
Pros:
- Guaranteed income for life: A QLAC provides a guaranteed stream of income for the remainder of the individual’s life, which can help to ensure that they have sufficient income to meet their financial needs later in life.
- Can be used to supplement other sources of retirement income: A QLAC can be used to supplement other sources of retirement income, such as Social Security and pension payments.
- Tax advantages: QLACs have certain tax advantages, including being exempt from required minimum distribution (RMD) rules. This means that individuals do not need to start taking distributions from their QLAC until they reach the age specified in the contract. They can also reduce the required minimum distribution from other retirement accounts.
Cons:
- Limited flexibility: Once an individual has purchased a QLAC, they are generally committed to receiving the guaranteed income for the remainder of their life and do not have the option to change the contract terms or receive a lump sum payment.
- Early withdrawal restrictions: If an individual withdraws funds from a QLAC before the age specified in the contract, they may be subject to early withdrawal penalties.
- Limited options for beneficiaries: In some cases, the individual’s beneficiaries may not have the option to receive the remaining funds in a QLAC as a lump sum payment after the individual’s death.
- Potential for lost growth: Because funds in a QLAC are generally not invested in stocks or other growth-oriented investments, there is a potential for the individual to miss out on potential growth in their retirement savings.
Overall, it is essential for individuals to carefully consider these pros and cons before purchasing a QLAC and to consult with a financial professional to determine whether a QLAC is a suitable choice for their specific situation.
Payout options
The payout options for a Qualified Longevity Annuity Contract (QLAC) depend on the specific terms of the contract and may vary from one insurer to another. However, some standard payout options for QLACs include the following:
- Single life annuity: Under this option, the individual will receive a guaranteed income stream for the remainder of their life.
- Joint and survivor annuity: Under this option, the individual will receive a guaranteed income stream for the remainder of their life. A reduced income stream will continue to be paid to a surviving beneficiary after the individual’s death.
- Period certain annuity: Under this option, the individual will receive a guaranteed income stream for a specified number of years, regardless of whether they are still alive.
- Return of premium annuity: Under this option, the individual will receive a guaranteed income stream for the remainder of their life. Any remaining funds in the annuity will be paid to the individual’s beneficiaries after their death.
It is important to note that the specific payout options available for a QLAC may vary based on the contract terms and the insurer issuing the annuity. Therefore, it is always a good idea to carefully review the terms of a QLAC and to consult with a financial professional before making a purchase.
Related Article: What is a Qualified Annuity?
How Do Longevity Annuities Compare?
| Variable Annuity | Fixed Index Annuity | Fixed Annuity | Immediate Annuity | QLAC | |
|---|---|---|---|---|---|
| Principal Protection | No | Yes | Yes | Yes | Yes |
| Access To Principal | Yes | Yes | Yes | No | No |
| Control Over Money | Yes | Yes | Yes | No | No |
| Tax-Deferred Growth | Yes | Yes | Yes | No | No |
| Guaranteed Growth | No | Yes | Yes | No | No |
| Guaranteed Income | Yes | Yes | Yes | Yes | Yes |
| Inflation Protection | Yes | Yes | No | Yes | Yes |
| Death Benefit | Yes | Yes | Yes | Yes/No | Yes/No |
| Long-Term Care Help | Yes | Yes | Yes | No | No |
Next Steps
A QLAC annuity can be a great way to supplement your retirement income and make sure you have money coming in later in life. Contact us today to learn more about QLAC annuities or get a quote. We would be happy to help you understand how a QLAC annuity could fit into your retirement savings plan.
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Frequently Asked Questions
What is a Qualified longevity annuity contract (QLAC)?
A QLAC or qualified longevity annuity contract is an income annuity purchased under an IRA or a qualifying employer-sponsored retirement plan. It can start payments later than age 73 but no later than age 85. The funds allocated to QLACs may be excluded from Required Minimum Distributions (RMD) calculations after age 73.
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 payments begin more than a year after purchase. The deferral period is between your QLAC purchase and the date your income payments begin. 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 payments begin more than a year after purchase. The deferral period is between your QLAC purchase and the date your income payments begin. 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 payments can be for the same amount. 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?
Under the Secure 2.0 Act, a qualified longevity annuity contract now offers the opportunity to contribute up to $200,000 starting in 2023.
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 before the income start date. This option increases the Qualified Longevity Annuity Contract’s cost and decreases the deferred income payment. The second option offers no death benefit but provides higher income payments. However, if you die before 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 QLACs offer joint and survivor and joint and contingent payment options requiring the joint annuitant to be a spouse.
When must the joint annuitant start income payments if the owner dies before the income start date on a joint-life QLAC?
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 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 before 72.
Suppose 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 traditional IRAs?
If the owner’s death occurs before the owner’s required beginning date, the proceeds should be eligible for rollover. However, if the owner’s death occurs after the RBD, 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 no commutation benefit.
Can I access the funds inside the QLAC?
A Qualified Longevity Annuity Contract (QLAC) has no cash surrender value or commutation benefit.
What is a qlac ira?
A QLAC IRA (Qualified Longevity Annuity Contract IRA) is an individual retirement account (IRA) with a QLAC annuity contract. The QLAC annuity provides a guaranteed income stream starting at a specified age, typically after age 85. A QLAC IRA allows individuals to use a portion of their IRA savings to purchase a QLAC annuity contract, which can help to reduce the impact of inflation and market risk on retirement income.