What Does QLAC Stand For and How Does It Work?
Demystify QLACs: Understand what these specialized deferred annuities are, how they function, and their role in securing your long-term retirement income.
A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity designed to provide a guaranteed income stream later in retirement. It addresses the concern of outliving one’s savings by ensuring a steady payout that begins at an advanced age. QLACs integrate with qualified retirement plans, offering a unique approach to long-term financial security.
Understanding the QLAC Concept
A Qualified Longevity Annuity Contract (QLAC) is a deferred income annuity purchased within a qualified retirement plan, such as an Individual Retirement Account (IRA) or a 401(k) plan. This contract guarantees a stream of regular income payments that commence at a pre-selected age, not later than age 85. The primary purpose of a QLAC is to mitigate longevity risk, the possibility of retirees exhausting their savings during an extended lifespan.
Traditional retirement planning often focuses on accumulating sufficient assets, but it can overlook the challenge of distributing those assets effectively over an unpredictable lifespan. QLACs offer a solution by converting a portion of retirement savings into a guaranteed income stream that activates when other funds might be dwindling. QLACs receive specific regulatory backing from the IRS, allowing them to be held within qualified plans while providing favorable tax treatment. This design helps individuals secure a predictable financial floor during their later years.
Core Features of a QLAC
QLACs possess distinct characteristics. Income payments typically begin at a predetermined advanced age, no later than age 85, and continue for the remainder of the annuitant’s life. These payments can be structured as single-life annuities, covering only the contract holder, or as joint-life annuities, providing income for both the contract holder and a spouse. Once payments commence, their continuation for life is guaranteed by the issuing insurance company.
A fundamental aspect of QLACs is their non-forfeitable interest, meaning the annuitant retains an undeniable right to the payments once the contract is purchased. This feature provides security, assuring that the promised income stream will be delivered as specified. QLACs generally do not include a cash surrender value, which means the policyholder cannot cash out the contract early for a lump sum. This design reinforces the long-term income planning objective of the product.
Many QLACs include a return of premium death benefit, which offers a level of protection for the initial investment. If the annuitant passes away before payments begin or before receiving total payments equal to the premium paid, a designated beneficiary typically receives the remaining premium amount. This feature addresses concerns about losing the invested capital if an individual’s life expectancy is shorter than anticipated. QLACs can be funded using assets from various eligible retirement accounts, including traditional IRAs, Roth IRAs, 401(k)s, 403(b)s, and governmental 457(b) plans. Some QLAC contracts may also offer an optional inflation protection rider to help the purchasing power of the income stream keep pace with rising costs over time.
QLAC Contribution Limitations
The Internal Revenue Service (IRS) establishes specific rules governing the maximum amount that can be invested in a QLAC to ensure it maintains its favorable tax treatment. The SECURE 2.0 Act of 2022 significantly simplified these rules. The previous 25% of aggregate account balance limitation was eliminated, streamlining the process for individuals considering a QLAC.
Currently, the primary constraint is a lifetime dollar limit on the amount that can be used to purchase a QLAC. For 2025, this limit is $210,000, an amount that is indexed for inflation and may be adjusted in future years. This lifetime maximum applies to all QLAC contracts purchased by an individual across all their qualified retirement accounts.
Adhering to these contribution limits is crucial for a QLAC to receive its intended tax benefits, particularly the exclusion from Required Minimum Distribution (RMD) calculations until payments begin. Funds invested in a QLAC within these limits are not subject to RMDs until the annuity’s payout start date, which can be as late as age 85. Exceeding the established dollar limit can lead to the QLAC losing its qualified status, resulting in the forfeiture of these tax advantages and potentially triggering immediate RMD obligations on the excess amount. If an individual inadvertently exceeds the limit, there are provisions that may allow for correction, such as returning the excess premium by the end of the calendar year following the overpayment, to maintain the QLAC’s qualified status.