QLAC Qualified Longevity Annuity Contract
Postpone RMDs with a QLAC
Most retirees don't need to tap their Traditional IRA early in retirement but are forced to because of Required Minimum Distributions (RMDs). Once you reach RMD age, you must take money from your IRA each year. RMD age recently changed from 70&1/2 to 72, so check with a tax professional to find out what group you fall into.
If you're in this situation and want to avoid taking some RMDs until later in retirement, there's an annuity that 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.
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 Traditional IRA and other pre-tax accounts once you reach RMD age. The IRS makes you withdraw this money so it can be taxed. Typically RMDs are fully taxable and included in your taxable income.
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Recently, RMD age has increased from 70&1/2 to 72 with the SECURE Act. Make sure you know which age you have to start taking RMDs by speaking with a tax-professional.
Back in July 2014, the Treasury Department relaxed RMD rules a bit to encourage you to financially prepare for retirement. The new rules allow you to buy a QLAC with your IRA and not include the value of this QLAC annuity in your RMD calculations.
So, how can buying a QLAC reduce my income taxes?
Let’s assume you have a Traditional IRA and you invested the maximum allowable $145,000 into a QLAC with an income start date of age 80. If you did not buy a QLAC, that $145,000 would grow in value and when you reached RMD age, you'd have to withdraw your first RMD. Your RMD amount is fully taxable as income, obliging you to include the full amount in taxes.
But with a QLAC, you're allowed to omit this $145,000 from your RMD calculations. So the tax savings from not having to withdraw RMDs for close to 10 years could be quite significant. Of course an exact calculation of your tax savings would depend on how much your IRA account grew during and your income tax bracket.
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 RMD age and are not taking any income payments from your annuity until 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 (while it is in it's "deferral period"). Here’s a summary of the most important features and restrictions:
1. The maximum QLAC purchase payment limit is the lesser of:
b. 25% of aggregated Traditional 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.
4. Income can be Single Life or Joint Life, allowing you to include a spouse to be protected under your QLAC as well.
5. Payout options are limited to Life Only or Life with Cash Refund. Payments with guarantee periods are not allowed.
6. Inflation adjustments may be available so long as the income you receive will meet with IRS guidelines.
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.
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 8 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. Possible benefits to spouses and other beneficiaries
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 good fit in your situation? Call us at 800-872-6684 for a free, no obligation conversation. We're here to help you.
You may be seeing the term QLAC and wonder if buying one would help you in retirement. Here are some of the most common questions our customers have about QLACs. If you want to learn more about QLACs and would 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 omit your QLAC from your Required Minimum Distributions calculations up until age 85. A QLAC may 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 other pre-tax accounts once you reach RMD age. Since you were allowed to grow this money pre-tax during your working years, the IRS makes you take RMDs so they can finally tax this money during your retirement. Your RMD withdrawals are included in your taxable income.
Q. What is a longevity annuity?
A longevity annuity is a contract you buy from an insurance company. It provides you with monthly income, often guaranteed for life, beginning at a future date. When you buy the annuity, you set the date you want your income to begin and the income amount is a contractual guarantee.
Q. What is different about a QLAC if it’s a longevity annuity?
A QLAC is a type of Longevity Annuity which allows you to defer taking RMDs on a portion of your Traditional IRA value. This can provide significant tax-advantages and guaranteed lifetime income. But not all longevity annuities are QLACs, so make sure you are buying the right type of annuity by speaking with an annuity expert. You can also get today's best QLAC rates by using the annuity calculator on our website.
Q. What specific changes make up a QLAC?
The main benefit of a QLAC is that you can defer taking RMDs on a portion of your Traditional IRA value up until age 85 and still meet required minimum distribution (RMD) rules! In other words, the premium you pay into your QLAC is not part of your RMD calculations.
Previously, you would have been required to include the value of your annuity for RMD calculations. That would put some people in a bind if they did not have enough liquid assets in other IRAs to meet their RMDs. Frequently, insuers won't even offer a longevity annuity (that is not a QLAC) that defers taking income from qualified funds past RMD age. QLACs changed this.
Q. Are there any restrictions for a QLAC?
Yes, there are certain restrictions:
1. You can only invest the lesser of a) 25% of your Traditional IRA or b) $135,000. The percentage limit is calculated by looking at the value of your Traditional IRA as of December 31st of the previous year.
2. You can only defer payments up to age 85.
3. Income payment options can cover either a single or joint life and can be either Life Only or Life with Cash Refund.
5. Period certain or term certain payment options are not allowed.
6. A commutation or cash surrender option is not allowed.
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 doesn't want to worry about running out of money.
Anyone who worries about the cost of at-home, nursing, or assisted care and wants an extra level of assurance 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.
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.
Perhaps the biggest benefit is that a QLAC provides guaranteed lifetime payments. This income stream is not affected by the stock market, giving you an income stream you can rely on. This might even make you feel more comfortable 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. In fact, a QLAC is not liquid, so you won't be able to access the funds in your QLAC except through the income stream.
You may also face the risk that you might not get all of your money back if you die prematurely and selected a Life Only QLAC instead of a Cash Refund QLAC.
Finally, you are locking in your payments at the time your purchase your QLAC. In a low interest rate environment, the guaranteed monthly income amount may be lower than 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 25%) of your Traditional IRA to a QLAC. You shouldn't get a QLAC if you don't think you'll have enough money in your early retirement years.
A QLAC is also more advantageous if you have some reason to think you have good longevity, such as 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 your income start date when you buy your QLAC. You also know exactly 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 in early retirement. Exactly how much you could save depends on a variety of factors such as your income tax bracket, the value of your Traditional IRA, and what a more traditional investments (stocks, bonds, mutual funds) could earn during your QLAC's deferral period. During your deferral period, your QLAC is not included in your RMD calculations, which can equate to significant tax savings. And the longer your defer starting your QLAC payments, the more you will receive on a monthly basis.
Q. What is the 25% limit based on?
This 25% limit is based on the value of your Traditional IRAs as of December 31st of the prior year. This does not include Roth IRAs, 401(k)s, or other pre-tax retirement accounts.
Q. What is the latest I can wait to start taking payments?
Payments must when you turn 85.
Q. Is there a minimum purchase age restriction?
Most companies will not issue a policy with a deferral period longer than a 40 years.
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. This can be a way to have income phase in at various points in time or to take advantage of interest rate changes. Call an annuity expert at 800-872-6684 for more information.
Q. What death benefit options are available with a QLAC?
QLACs offer an optional “Cash Refund” 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. If you die before you receive your premium payment back in full, your beneficiaries would receive the remaining balance.
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 once you pass away, payments end regardless of how much you've been paid. “Cash Refund” means that your premium will be returned to you either by you living long enough to receive it through your monthly QLAC payments, or if you die before that happens, your beneficiaries received the unpaid portion of your premium.
Q. How do I buy a QLAC?
Since QLACs have not been around very long, insurance companies are still 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 administrative fees.
Q. What is the maximum age I can buy a QLAC?
It varies by company, but a common restriction is that primary 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 type of funding can I use to buy a QLACs?
While your maximum premium calculation must be based on your Traditional IRA value, you can use other pre-tax funds to purchase your QLAC, such as a 401(k) or 403(b).
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 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.