A Qualified Longevity Annuity Contract (QLAC) is a special type of qualified Deferred Income Annuity. Like a qualified DIA, it converts savings in your traditional IRA or 401(k) into a guaranteed paycheck you can’t outlive. It’s unique in that income payments don’t need to begin by age 70½, which is typically necessary in order to comply with the IRS-mandated required minimum distributions (RMDs). QLAC income can begin as late as age 85, meaning that RMDs are waived on QLAC funds between the ages of 70½ and 85. Someone buying a QLAC would do so to take advantage of these features, namely:
- reducing longevity risk by converting retirement savings into a steady retirement paycheck continuing for as long as you’re alive; and/or
- deferring the RMDs on to pre-tax retirement savings that begin at age 70½ to as late as age 85, reducing taxable income in those years as well.
Let’s dig into each a little deeper:
How can you be sure your money will last for the rest of your life when you don’t know how long you’ll live? With a QLAC you can transfer the risk of outliving your savings to an insurance company by converting a portion of your savings into a guaranteed lifetime paycheck that continues for as long as you’re alive.
Similarly, deciding how much of your assets you can reasonably use each year is challenging when you don’t have a fixed spending horizon. A QLAC can help by being your reliable, steady source of income later in life. You can manage your assets up until age 85, for example, after which your livelihood will be funded by the QLAC.
RMD & Tax Deferral
The government requires you to begin withdrawing from your pre-tax savings accounts at age 70½, early for those with other sources of income and long expected lifespans. With a QLAC, you can reduce those required withdrawals and associated income taxes up until age 85.
By transferring money (up to $130,000 allowed) out of your qualified pre-tax retirement savings plan and into a QLAC, you reduce the balance of your assets subject to the RMD calculation. For example, if someone with a $520,000 IRA buys a $130,000 QLAC, his/her IRA balance subject to RMDs will decrease to $380,000. RMDs – IRA balance / RMD distribution period – will be 25% lower, comparably reducing taxable income as well. This will continue until QLAC income starts, at which point taxable income will increase to include the QLAC paycheck.
You’ll find more information about the QLAC, how it works, and how to approach the buying process in the QLAC Guide.