A qualified longevity annuity contract (QLAC) is a retirement plan that offers guaranteed lifetime income, tax advantages, and deferral of required minimum distributions (RMDs).
QLACs aim to provide financial security during retirement by ensuring you don’t outlive your funds. By investing in QLACs, you can secure your financial future and enjoy a worry-free retirement.A qualified longevity annuity contract (QLAC) is a retirement plan that offers guaranteed lifetime income, tax advantages, and deferral of required minimum distributions (RMDs).
QLACs aim to provide financial security during retirement by ensuring you don’t outlive your funds. By investing in QLACs, you can secure your financial future and enjoy a worry-free retirement.
Summary
- QLACs provide guaranteed lifetime income, tax benefits, and the ability to defer RMDs for qualified retirement plans and IRAs.
- The contribution limit has recently been increased to a maximum of $200,000 with various options such as death benefits, cost-of-living adjustments (COLA) & annuity laddering available.
- Expert advice is recommended when selecting an insurance company due to potential drawbacks like inflexibility & reliance on the financial health of the issuer.
Need help choosing the best annuity for your unique situation? Have questions about getting a QLAC annuity? If so, it’s best to speak with an annuity specialist. Watch this short video to see how I can help you do this (at no cost to you!).
How QLACs Work
You can purchase a QLAC with money from an existing retirement account, like a 401k or individual retirement account (IRA). You can defer RMDs on the amount used to purchase the QLAC up until age 85 and on your chosen date. Once you reach that date, you’ll receive monthly payments from the QLAC. You’re guaranteed to receive these payments for the rest of your life.
This delay of RDMs not only reduces taxable income in earlier retirement years but also ensures a consistent income stream later in life when other resources may be depleted. Having a lower income may even help put you in a lower tax bracket, providing further benefits, such as potentially reduced Medicare premiums.
Benefits of a QLAC
QLACs offer advantages like:
- Tax reduction: Because QLAC contributions are excluded from RMDs, you can reduce taxable income in your early retirement years.
- Future income planning: QLACs provide a predictable, guaranteed income starting at a future age, which helps plan for longevity risk.
- Enhanced financial security for late retirees: By deferring payouts, QLACs can help provide a later-retirement-year cushion when other income sources may diminish.
- Protection of savings from market fluctuations: Since they aren’t tied to the market, QLACs provide stable income regardless of economic downturns.
- No annual fees: Unlike some other investment products, QLACs don’t charge annual maintenance fees, which can help preserve retirement savings.
- Potential gains for spouses and other beneficiaries: Some QLACs offer death benefit provisions or joint payout options, ensuring continued support for a spouse or heirs.
A QLAC ensures financial security in retirement. It guarantees that individuals won’t outlive their retirement savings, protects against the risk of depleting funds, and provides a reliable, lifelong income source.
Tax Advantages of a QLAC
QLACs provide guaranteed lifetime income along with tax benefits, including:
- Deferral of income taxes that are typically mandatory with RMDs;
- Decrease in an investor’s tax burden by protecting a segment of retirement account money from RMD calculations;
- Opportunity to postpone RMDs up until age 85, which can significantly reduce your tax burden.
Compared to other investments that may be subject to stock market or interest rate risk, QLACs provide income security at a competitive cost.
Exemption from RMDs
A key benefit of QLACs lies in their exemption from RMD rules. RMD refers to the minimum sum of money you must draw from retirement accounts annually — typically starting at age 73-75 depending on your birthdate.
However, with a QLAC, it’s possible to delay receiving payments until age 85. Retirees can thus maximize tax effectiveness, making use of IRS allowances and avoiding an increase in their tax bracket. Keep in mind that the maximum age for deferral of RMDs with a QLAC is 85 years; you’ll have to start withdrawing after that point.
Disadvantages of a QLAC
However, QLACs also come with potential drawbacks, including:
- A maximum contribution of $210,000 in 2025: This amount may not be sufficient for a QLAC to be the only source of retirement income.
- Deferral of income payments only up to age 85: This lack of flexibility may be a problem if you’d like to plan further ahead or start receiving payments later on.
- Restricted payout choices: QLACs typically offer less customization than other types of annuities.
- Restrictions on types of investments: QLACs exclude options like variable, multi-year guarantee, or index annuities, as well as other deferred income annuities that might offer higher growth or more features.
QLACs are rigid and may not be the right choice for everyone. Upon purchasing a QLAC, access to the funds is lost until the annuity begins.
It’s important to understand both the advantages and disadvantages to choose a retirement plan that is best for you, whether that’s a QLAC or another type of annuity.
QLAC Contribution Limits
QLACs do come with contribution limits — you aren’t able to invest more than $210,000 in 2025 over all accounts and contracts. This limit is increased each year.
The SECURE 2.0 Act of 2022 allowed individuals to transfer up to $200,000 to a QLAC. The law also required annual adjustments for inflation and the elimination of the rule that capped QLAC premiums at 25% of the participant’s total plan assets. The contribution amount was increased to $210,000 in 2025.
Choosing the Right Insurance Company for Your QLAC
Selecting an insurance company for your QLAC is a critical step, given that only some companies provide QLACs and their financial strength matters greatly. A.M. Best and S&P Global Financial Strength Ratings can be consulted to ascertain the financial strength ratings of the annuity company.
Additionally, you should assess the reputation and customer satisfaction of the annuity company by consulting the National Association of Insurance Commissioners (NAIC). Evaluating the suitability of the specific product for your needs is also a wise step.
Customizing Your QLAC: Options and Strategies
Customizing your QLAC with options like death benefits, cost-of-living adjustments (COLA), and annuity laddering can help optimize your retirement income strategy.
A return-of-premium death benefit is a feature of considerable value that can be included in a QLAC. This ensures your beneficiary receives a refund of your initial premium if you die before or shortly after the income start date.
A COLA is a mechanism that adjusts annuity payments in response to inflation. This is accomplished by referencing inflation readings, such as those found on the Consumer Price Index (CPI). Incorporating a COLA add-on will necessarily result in diminished payments, at least initially. You should also consider whether the inflation protection warrants the lower initial payments, taking into account your life expectancy.
A QLAC ladder is a strategy of purchasing a series of smaller QLACs over several years to manage risk. The purpose of laddering in QLACs is to diversify your portfolio and reduce interest rate and inflation risk. Laddering QLACs may yield a higher payout when purchased at an advanced age and can assist in risk management.
Conclusion
QLACs offer a powerful retirement income solution, providing guaranteed lifetime income, tax advantages, and the ability to defer RMDs.
By consulting with an annuity expert, you can make educated decisions regarding your annuity investments, ensuring a safe and secure retirement income strategy that meets your unique financial goals and needs.
By consulting with an annuity expert, you can make educated decisions regarding your annuity investments, ensuring a safe and secure retirement income strategy that meets your unique financial goals and needs.
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