At its base, a QLAC is a Deferred Income Annuity, which converts a lump-sum premium into a future guaranteed lifetime paycheck. However, it’s unique in its ability to be purchased with pre-tax savings and have the paychecks start after age 70½, the normal required start for distributions on tax-deferred accounts. Only Deferred Income Annuities with the QLAC designation qualify for RMD deferral.
QLACs have the following limitations:
Source of Funds: QLACs can only be purchased with funds from non-Roth IRAs, 401(k), 403(b), and 457(b) plans. QLACs cannot be purchased with funds from Roth IRAs, defined benefit plans, or any after-tax savings accounts.
Maximum Premium Contribution: A maximum contribution of $130,000 or 25% of your account balance, whichever is less, is permitted. If your account balance (of your traditional IRA, 401(k), or other qualifying plan) is at least $520,000, $130,000 is allowed. Otherwise, the contribution can be at most 25% of that plan’s account balance.
- All Non-Roth IRAs can be aggregated in determining the 25%. The account balance used is as of December 31st of the prior year.
- For all other accounts – 401(k), 403(b), and 457(b) – the 25% is calculated separately for each account (no aggregation allowed) as of the most recent valuation date.
Deferral to Between 70½ and 85: QLAC income must begin between ages 70½ and 85. Normally, required minimum distributions on tax-deferred accounts begin at age 70½, but the QLAC allows you to delay the start of your income payments to as late as age 85.
No Market-Based Adjustments: The QLAC cannot have any variable or market-based components. The income level must be specified upfront and fully guaranteed. The only exception to this rule is an inflation adjustment rider which increases the income payments annually.
No Cash Value or Liquidity: As a pure income annuity, the QLAC cannot have any liquidity or be surrendered for cash value. Instead the QLAC offers a steady paycheck that continues as long as you’re alive.
At Issue QLAC Designation: The deferred income annuity must be designated as a QLAC when the contract is issued. Anything purchased before July 2014 cannot be a QLAC. An annuity that’s already been issued cannot be given the designation.
Head to the QLAC Guide to learn more about the product, how it works, and whether it makes sense for your retirement.