How does a QLAC differ from other longevity insurance and income annuity products?

The Qualified Longevity Annuity Contract (QLAC) is a specific kind of Deferred Income Annuity. It differs from other similar products because it is the only way to buy an income annuity within a pre-tax retirement savings account if you’d like the income start more than a year from when you buy the product and after age 70½. The QLAC is also the only way to avoid taking RMDs between ages 70½ and 85

There’s a lot to that answer, so let’s break it down a bit.

Income annuities come in two types: immediate and deferred.

  1. The first type is for those who want to have the income from the product start in the next 12 months, in which case the product is called an immediate annuity, an immediate income annuity, or a Single Premium Immediate Annuity (SPIA).
  2. The second type of income annuity, a Deferred Income Annuity (DIA), is one where the income starts at least two years from the date of purchase, but usually much later than that. There’s no hard and fast rule, but generally if income starts more than ten years in the future, it is is considered a longevity annuity or longevity insurance. There’s a lot of research from academics and market practitioners suggesting that buying longevity insurance is a really cost-effective and low-risk way to avoid running out of money.

Prior to the IRS rulemaking that created the QLAC, there was just one problem: IRS rules mandated that you had to spend down a portion of your retirement assets every year starting at age 70½. These are called the required minimum distribution rules and it made it very difficult to buy a longevity annuity inside tax-deferred plans, like a 401(k) or IRA.

The QLAC rules allow for the purchase of a deferred income annuity up to $130,000 or 25% of retirement assets (whichever is less) and made that amount exempt from from the RMD rules.

As an example, if you had $520,000 of IRA assets at December 31, 2017 and purchased a $130,000 QLAC in 2018, the amount of your retirement assets that would be subject to the RMD in 2018 (assuming no change in portfolio value) would be $380,000, rather than the full $520,000.

There are additional stipulations beyond just the size of the purchase. In order to be considered a QLAC, the product must be sold as such. Certain product features are prohibited, such as a change in income payments (other than an inflation indexing). Additionally income must start by age 85.

If income starts before age 70½, it is not considered a QLAC because deferred income annuities with income starting before the RMD rules kick in do not require QLAC designation. Additionally, products purchased with non-qualified funds that have already been taxed are not subject to the QLAC regulations, since they are not subject to the RMD rules.

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Learn more about QLACs, how they work, and whether they make sense for your retirement in the QLAC Guide.