A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity funded with investments from a qualified retirement plan or an Individual Retirement Account (IRA), and available for purchase through various insurance companies.
A QLAC guarantees monthly payments that begin after a specified date. As long as the QLAC follows Internal Revenue Service (IRS) requirements, it’s exempt from required minimum distribution (RMD) rules until the owner reaches age 85.
Key Takeaways
- QLACs allow a portion of RMDs to be deferred as part of a retirement strategy.
- The SECURE 2.0 Act of 2022 allows moving up to $200,000 from a qualified retirement plan or IRA to a QLAC, adjusting annually for inflation.
- QLACs defer taxes otherwise required by RMDs.
- You can purchase QLACs through various insurance companies.
Investing in a Qualified Longevity Annuity Contract (QLAC)
What Is an Annuity?
An annuity is a contract bought from an insurance company, where the buyer pays a lump sum or a series of premiums, and the insurance company agrees to pay the annuitant starting on a predetermined date. Payments continue for a specified period or until the end of the annuitant’s life, depending on the type of annuity purchased.
How QLACs Work
Expanded by the SECURE 2.0 Act of 2022, individuals can reallocate up to $200,000 (adjusted yearly for inflation) to a QLAC, removing the requirement to limit QLAC premiums at 25% of total plan assets.
A QLAC offers lifetime income once the chosen annuity start date is reached, paying out as long as the owner lives. Converting IRA funds to a QLAC can help avoid violating IRS RMD rules, which currently require annual withdrawals starting at age 73 (going to 75 in 2033).
The QLAC’s payout date can be deferred up to the owner’s 85th birthday, and a QLAC can also support a joint annuitant (like a spouse), ensuring both individual’s coverages under the same conditions.
QLAC Regulations and Benefits
Thanks to IRS guidelines, QLACs cut down on RMDs required annually from IRAs and qualified retirement plans, thereby potentially keeping retirees in lower tax brackets for longer, leading to tax incentives and lower Medicare premiums.
When QLAC income commences, the increased tax liability is based on the prior year’s end-account valuation. Following proper IRS protocols is essential for leveraging QLAC benefits.
QLAC Investment Strategies
One optimal QLAC approach includes laddering multiple QLACs over several years, akin to dollar-cost averaging, as varying annuity costs and interest rates can adjust the average contract cost.
Payments from laddered annuities can begin simultaneously or be staggered by age for tailored income needs, though RMDs must commence by age 85.
Adding cost-of-living adjustments (inflation-indexed payments) to a QLAC is another option, albeit reducing initial payouts based on life expectancy.
Example of a QLAC
Case Study: Shahana
Shahana, 67, plans to retire in three years and wants to minimize tax liabilities from RMDs. At 73, her RMD will be about $84,000. Shahana has multiple income sources like stocks, bonds, real estate, along with part-time consulting to keep active in her field.
By putting $100,000 from her IRA into a QLAC for future withdrawal at age 85, she defers RMD dates for that specific amount, leading to lower annual income taxes. At 85, the QLAC assures Shahana lifelong income with deferred RMDs only taxing distributions then, possibly at a lower bracket.
Important Considerations When Purchasing a QLAC
- Limitations: QLACs can be inflexible, limiting access to funds until annuity payments begin.
- Taxes: QLAC annuity income will generally be taxed as regular income on the designated date.
Costs
QLAC purchases involve a one-time investment from your IRA or qualified retirement account, with no additional fees, payable directly to the chosen insurance company.
Conclusion
A Qualified Longevity Annuity Contract (QLAC) is an advantageous deferred annuity funded through qualified retirement assets like IRAs. By purchasing through an insurance provider and specifying a payment date, retirees can better manage income distribution planning. QLACs cut down required annual retirement account withdrawals, providing strategic tax benefits while ensuring lifetime income post-deferral.
Considering QLACs fit into your financial goals can enhance both retirement stability and tax profile.
Related Terms: RIA, Qualified Retirement Plan, Annuities, SECURE Act 2.0, Required Minimum Distributions (RMDs), Deferred Annuities.
References
- Federal Register. “Longevity Annuity Contracts”.
- U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary”, Pages 7-8.
- U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary”, Page 2.
