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Expanding Qualified Longevity Annuity Contracts (QLACs)

Outliving retirement savings can be a concern for many retirees, especially if a large portion of their retirement savings are in Individual Retirement Accounts (IRAs) or Qualified Plan Retirement Accounts. Increasing life spans, IRS required minimum distributions and taxes may have an adverse impact on maintaining a comfortable, long-lasting retirement. A QLAC may help in certain situations by providing lifetime income and the potential for additional tax deferred growth. Secure Act 2.0 increased QLAC contribution limits which may give retirees even greater potential tax deferral and flexibility.

What is a QLAC?

QLAC stands for Qualified Longevity Annuity Contract. They are deferred income annuities that meet certain Internal Revenue Service regulations. A premium is paid to an insurance company and at a future date the QLAC policyholder elects to begin receiving a guaranteed monthly payout amount that continues for as long as they (or their spouse if a joint option is elected) live. By regulation, 85 is the maximum deferral age.

What are Required Minimum Distributions (RMDs)?

An RMD is the annual amount that IRA owners and Qualified Retirement plan participants must begin taking from their retirement accounts no later than their required beginning date (RBD). Generally, the RBD is April 1 of the year following the calendar year they reach age 73.¹ RMDs are taxable income and may push the account owner into a higher tax bracket.

¹Secure Act 2.0 increases the age at which RMDs must start to 75 starting in 2033.

QLAC Example

Mary is 70 and has $500,000 in an IRA funded while working as a nurse. She has other retirement assets and does not need to access the entire account balance for her immediate retirement income. Mary was recently widowed, her children are grown and she inherited her husband’s IRAs and now has a surplus of retirement savings.

Mary decides to put $200,000 into a QLAC and defer income until she is age 85. Mary purchases a single life only deferred annuity that will guarantee her an annual distribution of $61,676 for the rest of her life. The payments will begin in 15 years.

The example assumes a 3% rate of return on the non-annuity investment and a 30% Federal and State combined tax bracket. Individual tax rates may vary depending on income and resident state.

By purchasing a QLAC and deferring income that she currently does not need - Mary saves $31,464 in taxes by deferring her RMDs from 73-85.

How may a QLAC help reduce RMDs and defer taxes?

Certain retirees may have other assets or income sources besides IRAs and Qualified Retirement Plan Accounts. RMDs may not be needed or desired to support their current retirement needs. Assets held in a deferred income annuity (DIA) specifically as a QLAC will not need to be included in the calculation of your RMDs. Distributions from a QLAC can be deferred until age 85 if desired. Lower RMDs typically result in more money remaining in the IRA and further delaying their inclusion in the IRA owner’s annual taxable income.

What are the contribution limits for a QLAC?

Secure Act 2.0 increased the maximum contribution to $200,000 (indexed) and eliminated the percentage limit giving Americans an opportunity to further extend the longevity of their money.

	Non QLAC
Age	IRA Balance	RMD	Annual Tax	After Tax Income	Cumulative Tax
73	500,000	18,868	5,660	13,208	5,660
74	496,132	19,456	5,837	13,619	11,497
75	491,560	19,982	5,995	13,987	17,492
76	486,325	20,520	6,156	14,364	23,648
77	480,394	20,978	6,293	14,685	29,941
78	473,828	21,538	6,461	15,076	36,403
79	466,505	22,109	6,633	15,476	43,035
80	458,391	22,693	6,808	15,885	49,843
81	449,450	23,168	6,950	16,217	56,793
82	439,766	23,771	7,131	16,640	63,925
83	429,188	24,248	7,274	16,974	71,199
84	417,816	24,870	7,461	17,409	78,660
85	405,480	25,343	7,603	17,740	86,263
86	392,302	25,809	7,743	18,067	94,006
87	378,262	26,268	7,880	18,388	101,886
88	363,342	26,521	7,956	18,565	109,842

	QLAC
Age	IRA Balance	RMD	QLAC	Annual Tax	After Tax Income	Cumulative Tax	Cumulative QLAC Tax Deferral
73	300,000	11,321	0	3,396	7,925	3,396	2,264
74	297,679	11,674	0	3,502	8,172	6,898	4,599
75	294,936	11,989	0	3,597	8,392	10,495	6,997
76	291,795	12,312	0	3,694	8,618	14,189	9,459
77	288,237	12,587	0	3,776	8,811	17,965	11,976
78	284,297	12,923	0	3,877	9,046	21,842	14,561
79	279,903	13,266	0	3,980	9,286	25,821	17,214
80	275,035	13,616	0	4,085	9,531	29,906	19,937
81	269,670	13,901	0	4,170	9,730	34,076	22,717
82	263,860	14,263	0	4,279	9,984	38,355	25,570
83	257,513	14,549	0	4,365	10,184	42,719	28,480
84	250,690	14,922	0	4,477	10,445	47,196	31,464
85	243,288	15,206	61,676	23,064	53,817	70,261
86	235,381	15,486	61,676	23,148	54,013	93,409
87	226,957	15,761	61,676	23,231	54,206	116,640
88	218,005	15,913	61,676	23,277	54,312	139,917

Above table for illustrative purposes only. The after tax income assumes a 3% rate of return and a 30% tax rate.

QLAC Considerations

Single Life and Joint Life options may be available that may help provide income for a spouse or other heirs.
A QLAC may be more appropriate for individuals in good health with a longer life expectancy. A pre-mature death may result in a loss of any future payments, depending upon option chosen.
Once payments are started no changes may be made to the amount and timing.
Liquidity Limitations: A QLAC does not allow for withdrawals from the annuity contract or other similar benefits.
Maintaining QLAC Status: If you exceed QLAC purchase payment limitations, the IRA owner must remove the excess premium by no later than the end of the calendar year following the year in which the excess premium was originally made. If the excess amount is not removed, the contract may fail to qualify as a QLAC. It is the IRA owner’s responsibility to make certain the limits are not exceeded.
Income from annuity payments received from a QLAC cannot be aggregated or combined with income from other IRA contracts/assets for purposes of satisfying the required minimum distributions from those other sources.
A QLAC may not be appropriate for all investors. Please consult your tax, legal and financial professional for more information and to determine if a QLAC is appropriate based upon your unique circumstances.

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