SECURE Act 2.0: Key Changes to QLAC Rules
Recent legislative changes offer retirees more flexible and straightforward options for converting retirement savings into a guaranteed income stream for later life.
A Qualified Longevity Annuity Contract, or QLAC, is a deferred annuity purchased with funds from a retirement account. It is designed to provide a guaranteed stream of income later in life. This financial tool is connected to retirement plans such as traditional Individual Retirement Arrangements (IRAs) and 401(k)s. The SECURE 2.0 Act introduced significant updates to the regulations governing these contracts. These changes alter how individuals can incorporate a QLAC into their long-term retirement strategy.
Key QLAC Rule Changes Under SECURE Act 2.0
One of the changes was the increase of the maximum premium limit. Previously, an individual could only use up to $125,000 to purchase a QLAC. The new legislation raised this lifetime limit to $210,000 for 2025. This amount is indexed for inflation, allowing for potentially larger purchases in future years.
The rules were also simplified with the removal of the 25% account balance limitation. Before this change, the amount an individual could invest in a QLAC was capped at the lesser of the dollar limit or 25% of their total retirement account balance. Eliminating this percentage-based restriction streamlines the decision-making process, as individuals now only need to consider the flat dollar limit of $210,000.
The act also introduced provisions for spousal survivor benefits. New rules facilitate a return-of-premium death benefit. This feature allows for the return of the premium paid for the contract, minus any income payments already made, to a beneficiary if the contract owner dies before the annuity payments are scheduled to begin. This enhancement reduces the risk of forfeiting the entire investment, a previous concern for many potential buyers.
How a QLAC Affects Required Minimum Distributions
A primary function of a QLAC is its direct impact on a retiree’s Required Minimum Distributions (RMDs). The amount of money used to purchase the QLAC is excluded from the year-end account balance that is used to calculate the following year’s RMD. This exclusion can lead to a lower annual RMD obligation, which in turn reduces the individual’s taxable income for that year. The funds are effectively removed from RMD calculations until the annuity payments begin, which can be as late as age 85.
Consider an individual with a Traditional IRA valued at $1,000,000. A 75-year-old would have an RMD of approximately $40,650 for the year. This amount would be included in their taxable income. If that same individual used $210,000 of their IRA funds to purchase a QLAC, the value of their IRA for RMD calculation purposes would be reduced to $790,000. The RMD calculation would now be based on this lower amount, resulting in a new RMD of approximately $32,114 and lowering their taxable income by over $8,500 for that year alone.
Information and Decisions Required for a QLAC
Before purchasing a QLAC, an individual must make several decisions. The first step is to identify the source of funds, determining which specific retirement account, such as a Traditional IRA, 401(k), or 403(b), will be used for the purchase. Next, the purchaser must decide on the exact premium amount they wish to invest. This decision should be made while considering the lifetime limit of $210,000 per person.
The annuity start date, which is the age at which income payments will commence, must be selected. This date can be deferred up to the first day of the month following the individual’s 85th birthday. Finally, decisions regarding survivor and death benefits are necessary, such as whether to structure the contract for a single life or as a joint contract that continues payments for a surviving spouse.
The QLAC Purchase Process
The first action is to contact a qualified insurance company that offers these specific annuity contracts. It is important to work with an insurer experienced in handling these regulated retirement products.
The funding of the contract is handled through a direct trustee-to-trustee transfer. This means the funds move directly from the custodian of the retirement account, such as a brokerage firm, to the insurance company issuing the QLAC. This process is important as the individual should not take personal possession of the funds, which could trigger a taxable distribution and potential penalties.
After the transaction is finalized, the purchaser should expect to receive several documents. The insurance company will issue a formal contract detailing all the terms, including the premium amount, start date, and payment structure. The custodian of the original retirement account should also provide a confirmation statement showing the withdrawal and transfer of funds to the insurance provider.