Retirement planning often centers on one common fear: outliving your savings. Qualified Longevity Annuity Contracts, or QLACs, were designed specifically to address that risk by guaranteeing income late in life, after other resources may be depleted.
A QLAC is a special type of deferred income annuity. It is purchased with funds from a qualified retirement account, such as a traditional IRA or 401(k).
Unlike an immediate annuity that begins paying out right away, a QLAC delays payments until a future date—often age 78, 80, or as late as 85. In exchange for this delay, the insurance company guarantees income payments for the rest of your life, no matter how long you live.
The “qualified” designation matters because it ties the contract to tax-advantaged retirement accounts, allowing the money used to purchase it to come from pre-tax dollars.
Tax advantages are a key factor of a QLAC, especially as it relates to Required Minimum Distribution (RMD) rules. Under most circumstances, once you reach the RMD age (currently 73, moving to 75 for those born in 1960 or later), the IRS requires you to withdraw a minimum amount annually from tax-deferred accounts.
A QLAC can help you avoid this. If you use tax deferred funds to purchase a QLAC, those monies are excluded from the RMD calculation until payments actually begin.
So money placed in a QLAC continues growing tax-deferred. And it doesn’t count against your RMD balance, potentially lowering your taxable income in the short term.
As of 2024, the IRS allows individuals to invest up to $200,000 (indexed for inflation) across all QLACs they own, regardless of the value of their retirement accounts, an increase from previous limits.
There are a number of reasons why someone planning for retirement may consider a QLAC. These include:
Before purchasing a Qualified Longevity Annuity Contract, there are significant elements to consider. The money used to purchase a QLAC is generally illiquid. You can’t access it for emergencies once the contract is signed, unless you have included optional riders. If you die before the payments begin (or soon after), you may receive less than you put in (without proper rider options). QLAC payments are fixed and usually don’t account for inflation. Since the QLAC may not pay out for 15 or 20 years, buying power could be significantly diminished.
Riders to the QLAC can help guard against some of these situations, but they reduce payout amounts.
Qualified Longevity Annuity Contracts tend to make the most sense for retirees who:
Miser Wealth Partners can help you determine if a Qualified Longevity Annuity Contract or other annuity can be a useful part of your retirement planning. We’ll give you detailed information, and then let you make an informed decision about how to plan for your future.
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