What Is a Qualified Longevity Annuity Contract (QLAC)?

A Qualified Longevity Annuity Contract (QLAC) is a specialized type of deferred annuity designed to provide guaranteed income later in life. It serves as a financial tool within retirement planning, helping individuals mitigate the risk of outliving their retirement savings.

Understanding QLACs

A QLAC is a specific form of deferred income annuity. Its main purpose is to provide a reliable income stream far into the future, addressing the concern of longevity risk, which is the possibility of depleting one’s savings during a prolonged retirement. These contracts are typically funded using money from qualified retirement accounts, such as traditional Individual Retirement Accounts (IRAs) or employer-sponsored plans like 401(k)s.

QLACs are distinct from other general annuities because they receive specific regulatory backing and are designed for long-term income security. A significant feature of a QLAC is its exemption from Required Minimum Distribution (RMD) calculations for the portion of funds used to purchase it. This exemption applies up to a certain limit, allowing those funds to remain tax-deferred longer within the retirement account structure.

How QLACs Provide Income

The income generation from a QLAC involves a “deferral period,” which is the time between the purchase of the contract and the commencement of income payments. Individuals can select their desired income start age, with payments typically beginning in their late 70s or early 80s, and no later than age 85. This extended deferral allows the invested funds to grow on a tax-deferred basis until payments begin.

QLACs offer various payout options, including a single life annuity, which provides income for the life of one individual, or a joint life annuity, designed to cover two individuals, such as a spouse. Many QLACs include “non-forfeiture” features, such as a return of premium or cash refund option. These features ensure that if the annuitant passes away before receiving payments equal to the premium paid, a designated beneficiary will receive the remaining balance. Once payments commence, they are guaranteed for the remainder of the annuitant’s life, providing financial stability regardless of market performance.

IRS Regulations for QLACs

The Internal Revenue Service (IRS) establishes specific rules governing QLACs to ensure their proper use within retirement planning. As of the SECURE Act 2.0, the maximum premium limit for a QLAC is $200,000, which is a lifetime cap and applies across all qualified retirement accounts. This legislation eliminated the previous rule that capped premiums at 25% of an individual’s total retirement account balance.

A key tax advantage of QLACs is that premiums paid into them are excluded from Required Minimum Distributions (RMDs) until the income stream begins, allowing for extended tax deferral beyond the typical RMD start age of 73. Funds from traditional IRAs, 401(k)s, 403(b)s, and governmental 457(b) plans can be used to purchase a QLAC. Income payments from a QLAC must begin no later than the first day of the month following the annuitant’s attainment of age 85. To qualify for these favorable tax treatments, a QLAC must be a “plain vanilla” deferred annuity, meaning it cannot be a variable contract, an indexed contract, or include complex features like cash surrender values or commutation benefits.

Steps to Purchase a QLAC

Acquiring a QLAC involves several practical steps, beginning with a thorough assessment of one’s retirement finances and goals. Prospective buyers should determine their current retirement account balances and the types of accounts they hold, as QLACs are funded specifically from qualified plans like IRAs and 401(k)s. Consideration should also be given to the desired age for income payments to commence, whether single or joint life coverage is preferred, and any specific non-forfeiture options that are important for their financial security.

QLACs are offered by various insurance companies and can typically be purchased through financial advisors or brokers who specialize in retirement planning and annuities. The process generally involves contacting an insurer or advisor to obtain quotes and complete an application form. Funding the QLAC is accomplished by directly transferring money from an eligible retirement account to the annuity provider. Upon successful completion of these steps, the buyer receives confirmation of the contract, establishing their future guaranteed income stream.