Why wouldn’t someone buy a QLAC?

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 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.

While QLACs might be a great purchase for someone who wants to reduce longevity risk and/or defer RMDs, it’s not the solution for everyone. Here are some of the reasons not to buy a QLAC:

  • Another source of income, such as a pension, covers your retirement expenses. One of the main purposes of a QLAC is to reduce longevity risk, or the potential to outlive your savings. If this isn’t a concern because you already have enough lifetime income, a QLAC might not be for you. However, it could still make sense if you’re goal is to defer RMDs.
  • You’re looking for equity exposure or a high risk investment. QLACs are insurance products, not investment products. QLACs provide steady income – much like bond interest or equity dividends – that continues for as long as you’re alive. Those who outlive their life expectancies would end up earning a substantial return, but this isn’t a reason to purchase.
  • You’re in poor health. The value you’ll get from a QLAC is linked to your longevity: the longer you’re alive, the greater the benefit. If you’re in poor health and have a below average life expectancy, the longevity insurance provided by a QLAC will not be helpful.
  • You have less than $40,000 in your IRA or 401(k). QLACs can only be purchased with qualified pre-tax savings in your 401(k) or IRA. The maximum purchase amount is 25% of your 401(k)/IRA savings, or $130,000, whichever is less. If you have less than $40,000 in your IRA, you’ll have limited options as the minimum QLAC premium for most carriers is $10,000. However, if you have after-tax personal savings you’d like to convert into retirement income, consider a non-qualified deferred income annuity (DIA) instead.
  • You need your full RMDs starting at 70½. After longevity protection, the QLAC’s secondary purpose is to provide relief from the required minimum distribution requirements that begin at age 70½. So, if you’ll need the full RMDs to cover your expenses in retirement, a QLAC might not be a useful purchase.