QLAC Qualified Longevity Annuity Contract

Written by Hersh Stern Updated Monday, December 9, 2019

Postpone RMDs with a QLAC

Most retirees don't need to tap their IRA accounts early in retirement. Yet, required minimum distribution (“RMD”) rules force them to take money from their IRAs every year starting as soon as they reach age 70-1/2.


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If you're in this situation and want to avoid taking some RMDs until much later in retirement, there's an annuity which can do that for you. It's called a Qualifying Longevity Annuity Contract or QLAC, for short (pronounced cue-lack). A QLAC is a deferred income annuity whose account value is free of RMDs until you're 85.

In this article I explain what a QLAC is, how it works, and how to set one up.

If you'd also like to get an instant QLAC calculation, simply enter your age, income start date, and amount to invest. Our QLAC Calculator is free, your phone number is not required, and your quotes are viewable online.

Unlocking the mysteries of a QLAC

What exactly is a QLAC?

A QLAC is a type of longevity annuity (also known as deferred income annuity). You set up a QLAC by transferring money from any of your existing IRA or 401k accounts to an insurance company annuity. Your QLAC is designed to pay you a steady monthly income later in life.

In July, 2014, the IRS approved the purchase of QLACs with pre-tax or so-called "qualified" account money.

The annuity that makes up a QLAC isn’t a new idea. Longevity annuities have been around for years. But the way the IRS now treats a longevity annuity within a tax-deferred retirement account, such as an IRA or 401(k), has changed.

QLAC Annuity

How a QLAC Annuity Works

Before we delve into the details, let’s first explain how a QLAC longevity annuity works. This is an annuity in which you pay a lump sum premium to an insurance company and then at a future date which you specify today, you begin receiving a guaranteed monthly payout amount that continues for as long as you (or your spouse) are alive.

The beauty of the longevity annuity is that the insurance company tells you today exactly how much income you will begin receiving in the future. There is no stock market or interest rate risk. The future income amount that’s quoted is guaranteed!

With a longevity annuity you get income security that starts in your old age and at an attractive price. Financial planners estimate that if you own a longevity annuity you can increase the amount you withdraw from your savings in the early years of retirement by as much as 30% because of the reassurance in knowing your income in later retirement is guaranteed by the annuity.

Another appeal of QLACs is that they are straightforward and transparent. They are easy to understand, they require only one upfront payment and have no annual fees.

No more RMD problems for Longevity Annuities

As I mentioned earlier, RMD is the acronym for Required Minimum Distributions.

RMD is the amount of money Uncle Sam requires you to withdraw each year from your IRA and 401k accounts once you reach age 70-1/2. The IRS makes you take this money out of your IRA and 401k accounts so it can tax that money. These required withdrawals are included in your taxable income.

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In July, 2014, the Treasury Department relaxed the RMD rules a bit, reflecting the government’s desire to encourage you to prepare financially for your retirement.

The new rules allow you to buy a longevity annuity with your IRA money and not worry about having to include the value of that IRA annuity in your RMD calculations from age 70-1/2 up to age 85.

So, how can buying a QLAC reduce my income taxes?

Let’s assume you have a traditional IRA and you invested the maximum allowable $130,000 into a QLAC with an income start date of age 80. If you did not buy a QLAC, that $130,000 would grow in value and when you reached age 70-1/2, your first year's RMD would be due. That amount would be added to your taxable income, and you would be obliged to pay income tax on it.

But with a QLAC, you're not forced to withdraw an RMD at age 70, nor in any of the subsequent 9 years. So the tax savings accrued from not having to withdraw RMDs for 10 years will be significant. Remember, had you not invested in a QLAC, you would have been responsible to remove RMDs from what is otherwise an IRA account. Of course, an exact calculation of your tax savings would depend on how much your IRA account grew during the 10 years and your income tax bracket at that time.

By investing in the QLAC you essentially postpone paying income tax on some of your IRA money.

How is my QLAC reported to the IRS?

Your insurance company is required to submit form 1098-Q to the IRS in order to report the status of your annuity as a Qualified Longevity Annuity Contract (QLAC). The insurance company is required to submit this form beginning with the first year in which premiums are paid, and ending with the earlier of the year in which the policyholder reaches age 85 or becomes deceased.

Once the income from your QLAC begins, you will receive a 1099-R from your insurance company. The 1099-R form reports the taxable income you've received from your QLAC.

New QLAC rules change the game

Under the new rules, as long as your longevity annuity meets certain conditions it becomes a “qualifying” longevity annuity or QLAC and is determined to meet the RMD rules even though you've reached age 70-1/2 and are not taking any income payments from your annuity until much later in life. The new regulations mean that premiums paid into a QLAC are not included in RMD calculations.

Your QLAC needs to meet certain conditions to be exempt from RMDs (until age 85). Here’s a summary of the most important features and restrictions:

1. The maximum QLAC purchase payment limit is the lesser of:

a. $130,000; applies to all applicable retirement assets (i.e., 401(k), 403(b), governmental 457(b) and IRAs)


b. 25% of aggregated IRA account values (including existing QLAC purchases) as of 12/31 of the prior year.

2. You can defer payouts only up to age 85.

3. QLACs cannot be invested in variable or index annuities.

4. Income options can be single or joint life, either life income or life income with cash refund. Guaranteed period or period certain options are not allowed. So if your longevity annuity meets these requirements, its value is excluded when calculating the RMD for your IRA, and when payments start on the QLAC, they are deemed to meet the RMD. The QLAC rules require insurers to report annually to the IRS on the value and status of your contract.

5. Only limited optional features are allowed including riders for inflation adjustment, survivor benefits (as long as the survivor payments are not greater than those made to you as the original owner) and “return of premium” death benefit, meaning your heirs could receive payment equal to the annuity premiums you paid to the insurer (minus any annuity payouts made to you).

How to buy a QLAC

Because QLACs are a relatively new product, only a few insurance companies presently offer contracts that meet the new IRS requirements.

As of September, 2015, the following companies offer QLACs: American General Guardian MetLife New York Life Pacific Life Principal Financial

It’s important to know that an annuity must be designed and labeled as a QLAC to qualify; buying a longevity annuity is not enough.

Regulators envision that most consumers will use only a fraction, say 10% or 20% of their retirement savings, for a QLAC and put the remainder towards other vehicles to generate retirement income before the QLAC starts paying out.

Beyond the QLAC basics

QLACs can also be used in more complicated annuity and financial planning strategies that are based on a concept called laddering in which you space out the maturity dates or dates on which income becomes available. The goal of these strategies is to diversify your portfolio and minimize interest rate risk. With staggered maturity dates that may stretch across years or decades, you can also plan for times when you anticipate needing more money such as for increased care or even to fund a purchase such as a retirement home.

Recap: Top 10 reasons to consider a QLAC

We’ve delved deep into the details of QLACs, so let’s recap some of the most compelling features:

1. Reduce taxes

2. Decrease RMDs

3. Plan future income

4. Enhance financial security for late retirement

5. Protect your savings from market downturns

6. No annual fees

7. Defer distributions

8. Benefits to spouses and other beneficiaries

9. Assist strategies for leaving assets to heirs

10. Potential for inflation protection

QLACs are expected to become more popular and account for a larger share of annuities purchased because of the advantages discussed here. Does a QLAC sound like a potentially good fit in your situation? Call us at 800-872-6684 for a free, no obligation conversation. We're here to help you.

+Additional Frequently Asked Questions About QLACs

You may be seeing the term QLAC a lot these days and wonder if this financial acronym is relevant to you and your needs. Here are some of the most common questions and answers our customers have had about QLACs. If a QLAC seems like a fit for you and you’d like to discuss the idea further, we’re here to help with no pressure or obligation. Give us a call at 800-872-6684 or leave a question or comment on this page.

Q. What is a QLAC?

A QLAC stands for Qualified Longevity Annuity Contract. A QLAC is a new form of longevity annuity. A longevity annuity is an investment that you buy today and begins making payments to you later in your life, such as when you reach your 70s or 80s. The difference between a longevity annuity and a QLAC is that new government rules give QLACs more favorable tax treatment.

You can now buy a QLAC with pre-tax money from your IRA or 401k, and you can hold them without taking Required Minimum Distributions (RMD) until age 85. A QLAC will reduce your income taxes.

Q. What is my RMD?

Your Required Minimum Distribution is the amount of money you are required to withdraw each year from your IRA or 401k accounts once you reach age 70-1/2. The IRS makes you take this money out of your retirement accounts so it can finally tax that money. Up to age 70-1/2 you can let your IRA grow tax-free. Beginning at age 70-1/2 these annual required withdrawals are included in your taxable income.

In July, 2014, the Treasury Department relaxed the RMD rules a bit, reflecting the desire to encourage you to save for retirement. The new rules allow you to buy a QLAC with your IRA or 401k money and not worry about having to include the value of that annuity in your RMD calculations from age 70-1/2 up to age 85.

Q. What is a longevity annuity?

A longevity annuity is a contract you buy from an insurance company. It provides you with monthly income payments that begin at a future date. When you buy the annuity, you set the start date for payments (these may be changed later) and the amounts of the payments are guaranteed by the insurer.

Q. What is different about a QLAC if it’s a longevity annuity?

While a QLAC is built upon a regular longevity annuity which has been around for a long time, the new QLAC rules have only been in place since mid-2014. To qualify for the more favorable tax treatment under these new rules, the annuity must be labeled a QLAC by the insurance company. So just buying a longevity annuity is not enough to meet the new requirements. Insurance companies are now offering QLACs that meet the IRS rules and you can find the most up to date selection of these QLACs on our website.

Q. What specific changes make up a QLAC?

The main impact of the QLAC rules is that you can defer payments on your longevity annuity held in your IRA or other retirement account until age 85 and be considered to meet the required minimum distribution (RMD) rules even though you haven’t actually begun to take income payments from the annuity contract! In other words, the premiums you pay into your QLAC are not part of the RMD calculations.

Previously, you would have been required to include the value of your annuity for RMD calculations starting at age 70-1/2. That would put some people in a bind if they did not have enough liquid assets in other IRAs with which to pay the taxes. It sometimes forced them to start taking income from their annuity before they wanted to, just to generate money to pay taxes.

Q. Are there any restrictions for a QLAC?

Yes, there are certain restrictions:

1. You can only invest the LESSER OF 25% of your non-Roth, Traditional IRA and 401k retirement account values or $130,000 (whichever is smaller). The percentage limit is calculated by looking at all your retirement plans separately and at all your IRAs collectively.

2. You can only defer payments up to age 85.

3. You can’t invest in a variable annuity or an index annuity.

4. Income payment options can only be single or spousal joint life, either life only or life income with cash refund. Non-spouse joint annuitants are limited to joint life only (not cash refund).

5. Period certain or term certain payment options aren’t allowed.

6. A commutation or cash surrender option is not allowed.

A QLAC may have additional features including a rider for inflation adjustment, a survivor benefit (as long as the survivor payments are not greater than those made to you as the original owner) and a return of premium death benefit, meaning your heirs could receive payment equal to the annuity premiums you paid minus any annuity payouts made to you.

Q. Why should I consider a QLAC?

A QLAC can give you peace of mind so you're not worrying about outliving your money. It enables you to spend on such things as travel, a vacation home or hobbies in early retirement without worrying that you're hurting your long-term financial security.

A QLAC may be ideal for someone who does not have family to depend on in their advanced age and who want to make sure they will be able to pay for additional care without being a burden.

Anyone who worries about the cost of at-home, nursing, or assisted care and want an extra level of assurance beyond other planning techniques can use a QLAC to pay for their preferred living situation in their later years.

Q. What are the benefits or advantages of a QLAC?

A QLAC allows you to reduce your RMDs and defer withdrawals from your IRA to as late as age 85. Reducing your RMD withdrawals for even a few years could help you significantly extend your retirement savings.

A QLAC gives you income security when you get to an advanced age such as your late 70s or 80s. Because of the long period between when you buy the annuity and the annuity start date, the pricing can be very attractive. The amount you would receive in payments is very significant compared to the initial premium.

Owning a QLAC can give you peace of mind to spend in your early retirement because you know that you have other resources in place if you live to an advanced age. It also offers you a way to plan for additional expenses or care you might need when you get to your later years. Some financial planners estimate this can enable you to increase you withdrawals from savings in early retirement by as much as 30%.

In addition, owning a QLAC can provide peace of mind because payments can be guaranteed to continue as long as you or your spouse are living, meaning neither of you will outlive your money.

Another advantage is knowing you have the income security from your QLAC which doesn't have exposure to stock market or interest rate risks might make you feel more comfortable with being more aggressive with your other investments.

Q. What are the drawbacks or disadvantages of a QLAC?

A QLAC has some drawbacks. It isn’t as flexible as other assets that can be easily moved among asset classes such as stocks, bonds, or mutual funds if your circumstances or market conditions change.

You may also face the risk that you might not get all of your money back if you die prematurely and you had selected a Life Only QLAC instead of a Cash Refund QLAC.

In a low interest rate environment the guaranteed monthly income amount you are locking in is not as attractive as it might be if interest rates were higher.

Q. Who should considering buying a QLAC?

A QLAC can be a good fit for many investors in different circumstances, so there is no one ideal buyer. A QLAC will work best if you have enough money to devote only a fraction (no more than 10% to 20%) of your total portfolio to a QLAC without jeopardizing either money you need currently or money to provide income in the earlier years of your retirement.

A QLAC is also more advantageous if you have a family history of living to an advanced age.

Q. How does a QLAC work?

A QLAC requires a single lump sum payment upfront. You elect the annuity start date and you know what your annuity payments will be when you agree to the contract. There are no ongoing fees. When you reach the annuity start date, you will begin receiving payments on the schedule you elected, typically monthly. To see how a QLAC would work in your circumstances, use the calculator at the top of this page. Just select your age, gender, how much you want to invest and an income start date. That will give you an idea of how much income you could expect to receive each month from your QLAC.

Q. How much could I save in taxes?

QLACs offer you the chance to reduce your income taxes. If you invested money in a stock, bond or mutual fund in your IRA, you would have to start taking distributions and paying taxes on those when you turn 70-1/2. If you put the money in a QLAC, you could wait until you are 85 to start receiving payments from your annuity. So you would save on taxes for up to 15 years compared to a traditional investment. And by deferring your income start date longer, you increase the size of your monthly annuity payments. The exact calculation of tax savings depends on projected rates of return for your annuity vs traditional investment and your income tax bracket.

Q. What is the 25% limit based on?

The total premium paid for your QLAC in IRAs (not including annuities in Roth IRAs) cannot exceed 25% of your total IRA balances (not including Roth IRAs), with IRA balances being measured as of 12/31 of the prior calendar year. The total premium paid for QLAC in an employer-sponsored retirement plan cannot exceed 25% of your account balance in that plan.

Q. What is the latest I can wait to start taking payments?

Payments must start no later than the first day of the month after the month in which you turn 85.

Q. Is there a minimum purchase age restriction?

Most companies require age 18 with no longer than a 40 year deferral of income start date from purchase.

Q. Can I have more than one QLAC or longevity income annuity?

Yes. There are advantages to splitting QLACs or longevity annuities with different insurance companies and different income start dates or features. This can be a way to have income phase in at various start points or to position yourself to take advantage of us interest rate increases. Talk to us for more information.

Q. What death benefit options are available with a QLAC?

All QLACs offer an optional “Return of Premium” feature, which must be selected at issue. This means that if you die before your annuity payments begin, your beneficiary receives a refund of the initial premium amount.

Q. What payout options are available with a QLAC?

Your payout options are limited to the following - Single Life Only, Single Life with Cash Refund, Joint Life Only and Joint Life with Cash Refund. “Life Only” means that if you pass away after payments have begun, there will be no payments made to your beneficiaries. “Cash Refund” means that if you die after payments have begun, your beneficiaries receive a lump sum return of your premium less any payments already made to you.

Q. How do I buy a QLAC?

Since QLACs have not been around very long, insurance companies are just rolling out products, and a contract must be designed and designated as a QLAC to qualify. It’s important to make sure your purchase meets all the QLAC requirements so you get the favorable IRS tax treatment. You can find the most comprehensive selection of QLACs on this website.

Q. What fees are there on QLACs?

There are no fees on QLACs. That is one of their attractions – they are straightforward, relatively easy to understand and entail no upfront or ongoing commissions or administrative fees.

Q. What is the maximum QLAC purchase age for annuitant and joint annuitant?

It varies by company but a common restriction is that annuitants cannot be older than 83 and joint annuitants cannot be older than 90.

Q. Are Roth IRAs or inherited IRAs eligible to be classified as a QLAC?

No. RMDs do not apply to Roth IRAs and inherited IRAs cannot be treated as QLACs.

Q. What if I make a mistake and put more money into a QLAC than the rules allow?

The rules have provisions that offer you some protection. Your annuity would still count as a QLAC if you return the excess premium, either in cash or in exchange for a non-QLAC annuity held in your retirement account. This must occur by the end of the calendar year following the calendar year in which you paid the excess premium. If you don’t return the excess premium by that deadline, then the entire annuity ceases to be a QLAC as of the date of the excess premium payment. If the excess goes toward a non-QLAC annuity, then the account balance must be increased to reflect that money for the purpose of calculating RMD. As you can see, it’s complicated, so you are far better off being very careful before you pay your premium than fixing a mistake later.

Q. What specific account types can hold QLACs?

They can be bought inside your IRA, 401(k), 403(b) and governmental 457(b) plan.

Q. If it is a joint payout and the owner/annuitant dies prior to the annuity date, is the joint annuitant subject to the traditional RMD rules or do they get advantage of the later income start date?

They get the advantage of the later income start date

Q. Is commutation, cash surrender or payment acceleration permitted with QLACs?

No. Commutation is a process allowed with some annuities by which you can terminate normal annuity payments and receive a lump sum distribution of the net present value. That and similar features like cash surrender and payment acceleration are not allowed with QLACs.

Q. Can a longevity annuity held in a retirement account be exchanged for a QLAC?

Yes. If an existing contract is exchanged for a contract that satisfies the QLAC requirements, the new contract will be treated as purchased on the date of the exchange. In such a case, the fair market value of the contract that is exchanged for a QLAC is treated as a premium that counts toward the QLAC limit. Executing such a move will depend on policies of the annuity issuer. For example, AIG, which introduced the first QLAC contract under the new rules, does not allow for these exchanges.

Q. Can money in an IRA that has begun distribution due to RMD rules be exchanged into a QLAC?

Yes. However, you should consult with a tax advisor to determine if a distribution must be made in order to satisfy RMD requirements for the calendar year of the purchase of the QLAC.

Q. If I hold a QLAC in my employer-sponsored retirement plan, what happens if I change jobs?

The law intends for QLACs to be “portable,” meaning that it should be possible for QLACs to be transferred from the plan or IRA in which they were purchased to another plan or IRA, either in a rollover transaction or in a trustee-to-trustee transfer. However, the final regulations did not specifically address the mechanics or requirements for this. For example, how such transfers would affect the QLAC premium limits applicable to the transferee plan or IRA. At a minimum, plan sponsors or individuals considering such transfers will need to work the insurance company issuer of the QLACs to make sure it can be done.

Q. If the QLAC owner dies prior to the annuity start date on a joint life QLAC, when must the joint annuitant start income payments?

For a spousal joint annuitant, the spouse must start income no later than the original annuity start date. For a non-spousal joint annuitant, income payments must begin by December 31 of the calendar year immediately following the calendar year of the owner’s death.

Q. Can a beneficiary roll over any death benefit proceeds?

If the owner’s death occurs before the owner’s required beginning date (RBD), the proceeds should be eligible for rollover. If the owner’s death occurs after the RBD, then the death benefit payment is treated as an RMD and not eligible for rollover. Similarly, if the surviving spouse’s death is after the RBD for the surviving spouse, then the death benefit payment is treated as an RMD and not eligible for rollover.

Q. What sort of reporting is involved with QLACs?

The IRS has said there will be a new Form 5498-A, Qualified Longevity Annuity Contract Information. It will be used by IRA custodians and company retirement plans to report QLAC information to the IRS and to you as the IRA owner. The form has not been finalized but you can see draft information here. The due date for reporting to the IRS and the owner is May 31.

Q. How will the QLAC payments I receive be taxed?

The QLAC regulations do not address taxation specifically, but experts in the field believe that taxation rules for contributions and distributions that would typically apply to a tax-qualified retirement vehicle would also apply for participants who are, or have, invested in a QLAC. This means that your payments would be taxed as income in the year that you receive them at the income tax rate that applies to your adjusted gross income, i.e. your regular tax bracket determined by your income.

Q. Are QLACs available in employer-sponsored plan?

The new rules make this possible, but it is up to individual employers to decide if they will offer this opportunity within their defined contribution plans. Experts expect this to happen gradually with some employers moving more quickly than others.

More Coverage:

Qualified Longevity Annuity Contract Reduce RMDS To Extend Retirement Savings

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Comments (34)

  1. Mil:
    May 11, 2015 at 07:28 AM

    Does the maximum premium apply to any one account or the sum total of all 401k and IRA accounts? If I had $250K in a 401K account and $500K in an IRA, what's the maximum that I could invest in a QLAC?

  2. Hersh Stern:
    May 11, 2015 at 07:29 AM

    Hi Mil-

    Your investment in a QLAC is limited to the lesser of either $125,000 or 25% of all your qualified retirement plans and Traditional IRAs taken collectively (on an aggregate basis). So in your case the max amount would be $125k. Additionally, Roth IRAs cannot be treated as QLACs.


  3. Marilynn:
    May 15, 2015 at 02:08 PM

    Can I purchase more than one QLAC? I’d like to buy a series of QLACs, one every few years.

  4. Hersh Stern:
    May 15, 2015 at 02:08 PM

    Hi Marilynn,

    Yes, you can purchase more than one QLAC, as long as the total amount you invest in all your QLACs does not exceed the smaller of: (a) $125,000, or (b) 25% of your combined qualified plan (IRA, 401k, etc.) balances.


  5. Bill:
    Jun 02, 2015 at 11:56 AM

    I inherited my mother’s IRA as a rollover. Would this inherited IRA be eligible for QLAC in order to postpone the RMD requirement?

  6. Hersh Stern:
    Jun 02, 2015 at 11:57 AM

    Hi Bill,

    The money in your inherited IRA is not eligible to fund a QLAC. The IRS regulations exclude inherited IRA monies.

    A deferred income annuity (“DIA”) is somewhat like a QLAC and can be funded with your inherited IRA. However, a DIA does NOT delay the RMDs you’ll need to withdraw from your inherited IRA.

    You can read more about deferred income annuities here:



  7. Joe:
    Jun 17, 2015 at 01:13 PM

    If I buy a QLAC with a Return of Premium (ROP) death benefit would the money received by a beneficiary be treated as taxable income or as a non taxable payment similar to a life insurance death benefit?

  8. Hersh Stern:
    Jun 17, 2015 at 01:14 PM

    Hi Joe,

    Since a QLAC is paid for with IRA or 401k money that has not been previously taxed, my opinion is that your beneficiary would owe income taxes on the lump sum death benefit. It should be treated as an inherited IRA. But please double check my opinion with a CPA or tax attorney (as I am neither) before you buy an annuity.


  9. John:
    Jul 16, 2015 at 02:17 PM

    I am already taking RMDs. Can I purchase a QLAC now and exclude the QLAC $125k from further RMD calculations until I start taking the withdrawals from the QLAC?

  10. Hersh Stern:
    Jul 16, 2015 at 02:18 PM

    Hi John-

    Yes, the Treasury allows you to buy a QLAC after even you’ve attained age 70-1/2. Most of the QLAC issuing companies also accept premiums up to age 80.


  11. James:
    Aug 03, 2015 at 09:37 AM

    You state that there are no fees involved with buying a QLAC, why would an insurance company offer them? How much commission is involved or management charge?

  12. Hersh Stern:
    Aug 03, 2015 at 09:44 AM

    Hi James-

    An insurance company certainly expects to earn some profit on its sale of a QLAC.

    How much profit it earns depends on its ability to predict the life expectancies of its policyholders plus its ability to invest safely yet also earn a return that’s greater than its cost. An insurance company typically invests the premiums it receives from the sale of QLACs in a general portfolio of bonds, mortgages, and real estate.

    Say the company earns X% a year from its investments. From that amount it subtracts Y% which reflects its total operating, sales and marketing, investment, and other costs, plus a profit margin. The difference between X% minus Y% is approximately how much interest the company can credit on its annuities and other lines of business.

    Regarding annual fees -- QLACs are in the class of annuities called “fixed” annuities. Fixed annuities do not charge any management fees. QLACs are not like mutual funds or variable annuities where an annual account management fee may be fees are deducted.

    Regarding the agent’s commission, I’ve written about this topic extensively here:


    Commission for the sale of a QLAC is similar to that for a Deferred Income annuity which is about 3% of the premium. However, this commission is already figured in your quotes. So the numbers you see at our website have the commission already deducted from them.


  13. Mil:
    Sep 08, 2015 at 09:55 AM

    I’ll soon be rolling over 401(k) funds at retirement. Is there a tax advantage to go with a QLAC vs. a regular deferred annuity? Assume $100K, retirement at 65 and annuity payout at age 80. Thanks in advance for your insights.

  14. Hersh Stern:
    Sep 08, 2015 at 09:56 AM

    Hi Mil-

    First, I’d like to make sure I understood your question correctly. When you wrote “regular deferred annuity,” did you mean the type of annuity that grows by a fixed interest rate each year for a set number of years (similar to a bank certificate of deposit)?

    If yes, then the QLAC provides a tax advantage not available with a regular deferred annuity. Only the QLAC will reduce the total amount subject to annual Required Minimum Distributions (RMDs) beginning when you reach age 70-1/2. For example, say you had an IRA with $400,000 and you decide to put $100,000 into a QLAC, then you will only need to withdraw RMDs from the remaining $300,000. This creates a tax savings.

    If you kept the entire $400k in a fixed deferred annuity, you would have to withdraw RMDs based on the entire $400k.


  15. Jane:
    Sep 14, 2015 at 01:41 PM

    I thought you could always use IRA money to buy a deferred longevity annuity without any cap to the amount?

  16. Hersh Stern:
    Sep 14, 2015 at 01:42 PM

    Hi Jane,

    Yes, that’s still possible (within limits which I’ll explain). You can invest almost unlimited amounts in longevity annuities as long as you leave enough non-annuity IRA money sufficient to cover your RMDs for the money in your annuities. Nothing’s changed there.

    What’s changed since July, 2014, is that you can now set aside up to $125k in a longevity annuity which meets the QLAC guidelines and forget about RMDs with respect to the premium in your annuity until you reach age 85.


  17. Wolfe:
    Sep 14, 2015 at 01:51 PM

    Questions on answer to comment #14:

    x% - is x tied to some internal/external "market" index? if so, what is it?

    y% - can you tell me the typical range for y%?

    If the above %'s are dependent on the $ amount of QLAC, please assume $125k.

  18. Hersh Stern:
    Sep 14, 2015 at 01:51 PM

    Hi Wolfe-

    The A. M. Best Company issues an annual report giving the X% or Net Yield for the major life insurance companies. Net Yield is defined as income from investments as a percentage of invested assets without taking into account capital gains or income taxes. Here’s the latest data (2014) for some of the bigger companies:

    5.89% American General (AIG)

    3.49% Guardian Life

    4.64% MetLife

    4.25% New York Life

    5.53% Pacific Lice

    4.63% Principal Financial

    X% has been dropping for most companies as the yields on bonds and mortgages decreases.

    Y% (i.e., what percentage of its invested assets are spent by a typical company in overhead and operating its business) is more difficult to nail down.

    I’m guessing that would be in the neighborhood of 2%, give or take, across the companies’ full book of business.

    Regarding the QLAC payout rates, those vary insignificantly between a $25k or $125k premium. Most companies apply rates which are proportional to the premium. So you won’t necessarily get a better deal by spending more with any one company. In fact, that makes it easier for you to diversify and spread your risk across several companies, a strategy I mention to clients.


  19. Rebecca:
    Oct 15, 2015 at 08:05 AM

    If I do not need the IRA minimum distribution advantage, is there any other reason a QLAC would be beneficial? I have heard that every dollar when paid out will be taxed. I have also heard there is another deferred annuity that can be about 2/3rds tax free when purchased outside an IRA. Is this true? Is it advantageous to purchase a deferred annuity from general savings rather than the QLAC??

  20. Hersh Stern:
    Oct 15, 2015 at 08:07 AM

    Hi Rebecca-

    A QLAC is an annuity funded specifically with money coming from your IRA. Whenever you receive distributions from your IRA, whether discretionary withdrawals you take from time to time or controlled periodic distributions such as from an annuity funded with IRA money, taxes will need to be paid on the full amount you received.

    Now, there is an analogous product to a QLAC, that can be purchased with non-IRA money. It’s called a “deferred income annuity.” If you use our calculator and, instead of selecting IRA or 401k for “Tax Status,” you select Savings, you’ll see similar quotes but the taxable portion will be listed at around 2/3 less than the taxes owed on QLAC income.

    The reason QLACs are taxed at 100% is because you’re receiving back IRA income that’s never been taxed previously.

    The reason a ‘Savings’ funded annuity is taxed 2/3 less is because the money you paid to the insurance company to buy that annuity was already taxed once before.

    The quotes themselves should be very close only the tax treatment is different because of the different sources funding each annuity.

    Regarding whether it’s advantageous to buy one of these annuities with IRA or non-IRA money — I’d be happy to discuss this with you if you call me at 800-872-6684.


  21. Will:
    Oct 15, 2015 at 08:07 AM

    I have a $60k variable annuity that matures in July 2016 that was purchased with IRA funds from Principal. Can I move that into a QLAC with no issues?

  22. Hersh Stern:
    Oct 15, 2015 at 08:09 AM

    Hi Will-

    QLACs are limited to 25% of all your IRA money or $125k, whichever of these two measures is lower. So if you have a total of $240k in IRAs then you can set aside 25% of that amount, which is $60k, in a QLAC. Otherwise, if you have less than $240k in aggregate IRAs, you’ll be limited to investing less than $60k in the QLAC.

    You may already know, too, that a QLAC cannot be invested in stocks. So you’ll need to liquidate your “variable” annuity and transfer the proceeds to a QLAC annuity (which is a “fixed” not variable annuity). The transfer can be tax-free.

    When you’re ready, contact our firm again and we’ll help you sort it out and apply for the QLAC.


  23. Susann:
    Oct 20, 2015 at 11:50 AM

    When calculating the 25% of all IRAs do you include Roths or only the IRAs subject to RMD? I have an annuity within an IRA that I'd like to convert to a QLAC. I have already been taking RMDs for a few years.

  24. Hersh Stern:
    Oct 20, 2015 at 11:50 AM

    Hi Susann,

    You do not include your Roth IRA account balances when totaling how much you have in IRAs when calculating the 25% amount for a QLAC. That’s because Roth IRAs are not subject to required minimum distributions.


  25. Penny:
    Nov 11, 2015 at 07:42 AM

    I have $229,000 in a 401k. Can I take 25% of that amount and buy a QLAC ?

  26. Hersh Stern:
    Nov 11, 2015 at 07:43 AM

    Hi Penny-

    Whether (or not) you can take an amount equal to 25% of the 401k and fund a QLAC will depend on whether (or not) you presently own a Traditional IRA equal to $229,000.

    You see, the key constraint on the amount you can invest in a QLAC is based on calculating 25% of your Traditional IRA balance, as December 31st of the prior year.

    So, if you don’t presently have a Traditional IRA, you are unable to buy a QLAC. You must first roll over your 401k into a Traditional IRA (before year end) and then buy the QLAC next year.


  27. Tommy:
    Nov 16, 2015 at 07:09 AM

    What's the earliest age I can purchase a qlac?

  28. Hersh Stern:
    Nov 16, 2015 at 07:10 AM

    Hi Tommy--

    There’s no age restriction in the tax code. However, the different insurance companies have set minimum ages. For example, New York Life allows you to purchase a QLAC as early as age 31. Pacific Life, on the other hand, requires that you are at least 52 years old. If you would like to see some QLAC quotes from a half dozen companies, please email me. I’d be happy to send them to you.


  29. Cam:
    Dec 07, 2015 at 02:33 PM

    Are there QLACs with a residual value for kids if their parents die?

  30. Hersh Stern:
    Dec 07, 2015 at 02:33 PM

    Hi Cam-

    Yes, one of the income options available with a QLAC is called a “Cash Refund” option. If the parents purchase an annuity with a Cash Refund, the premium is guaranteed to be paid back by the insurance carrier. If they parents pass away prior to payments beginning, the beneficiaries will receive a lump-sum refund of the entire premium. If the parents pass away after payments have started but before they received the entire premium back, the beneficiaries receive the remainder in a lump-sum.


  31. Jim:
    Feb 09, 2016 at 02:17 PM

    My wife and I both have IRAs. Are we limited to only one QLAC per family, or could we each get one?

  32. Hersh Stern:
    Feb 09, 2016 at 02:17 PM

    Hi Jim-

    You and your wife are each eligible to have your own QLACs. Each of your QLACs can be up to $125k, if that is no more than 25% of your individual IRAs. That means if you have $500k or more in your individual IRA you can move $125k of it into your QLAC. Similarly, if your wife has $500k or more in her individual IRA she can do the same.


  33. Robert:
    Apr 05, 2019 at 08:28 AM

    I am trying to get a joint life quote for a QLAC IRA of $52,000, WA state male aged 61 with non-spouse beneficiary male aged 41. Is this available? Age 85 for the payout for me.

  34. Hersh Stern:
    Apr 05, 2019 at 08:29 AM

    Unfortunately, all of our QLAC providers require that the joint annuitant be a spouse. Other than that, the rest of your parameters would be quotable.

    -Hersh Stern