QLAC is an acronym that stands for a Qualified Longevity Annuity Contract. The QLAC was created by a 2014 rule that permitted certain types of Deferred Income Annuities to be purchased within 401(k)s, IRAs, and other similar retirement plans and have the income from these policies start after age 70½.
Prior to 2014, it was not possible (in practical terms) to purchase a longevity annuity in your tax-deferred retirement account and elect to have income start later than 70½. The rule change was meant to address an unintended consequence of the Required Minimum Distribution (RMD) rules.
In order to understand what a QLAC is, let’s break it down word-by-word, starting with the word annuity.
In it’s simplest form, an annuity provides a regular, lifetime paycheck that is backed by a guarantee from an insurance company.
The QLAC is not any kind of annuity (in fact it has to be a specific type to be designated a QLAC). Rather, it’s a deferred income annuity where the income doesn’t start until you are well into retirement. When income starts in someone’s 70s or 80s, the policy is generally referred to as a longevity annuity or longevity insurance. The reason is that these kind of policies offer higher payout rates by starting later in someone’s life. By doing this, the QLAC is a relatively cost-effective way to pool longevity risk (i.e. the risk of outliving your money) with other people.
The terms has two meanings in the first context. First, the QLAC is qualified because it can be purchased with money that has been invested into a retirement account on a pre-tax basis. Second, the QLAC is qualified because it meets the RMD rules through a special exemption. Normally, pre-set withdrawals from your qualified accounts have to start by age 70½. The amount used to purchase a QLAC is exempt from these rules, so you don’t have to worry about that portion of your portfolio running afoul of IRS rules.
This is a term we’re all familiar with. When you’re buying a QLAC, you’re getting a guarantee (subject of course to the claims paying ability of the insurer backing the policy) from the insurer that will honor the contractual commitments of the policy.
Head to the QLAC Guide to learn more about the product and why it was created.