What Is a Qualified Longevity Annuity Contract (QLAC)?
The Annuity Man
In 2014, our friends at the IRS and the Treasury Department introduced the Qualified Longevity Annuity Contract (QLAC) as a way for consumers to plan for future income needs using their qualified (i.e. Traditional IRA, 401k, etc.) accounts. QLACs allow you to add your spouse/partner for a joint life income guaranteed payout that covers both lives regardless of how long either of you live. Sounds pretty good so far, so what’s the catch?
Limitations & Benefits
In my opinion, the main limitation of a QLAC is how much money you are “allowed” to put into the product. Under current IRS guidelines for 2020, the premium dollar amount that you can place in a QLAC is the lesser of 25% of your total IRA (non-Roth) assets or $135,000. That dollar amount will most likely be increased in the future, but those are the rules today. For example, if you have a $750,000 IRA, you can put maximum of $135,000 into a QLAC. If you have a $200,000 IRA, you can place $50,000 into a QLAC. See how that formula works?
QLAC lifetime income stream guaranteed amounts are primarily based on your life expectancy at the time you start the payments. The older you are, the higher the payment. Just like Social Security. Interest rates play a secondary role. In essence, you are transferring the risk to the annuity carrier to pay you for the rest of your life (or "lives" if it's joint)…regardless of how long you live.
QLAC rules allow you to defer payments within your IRA to start as early as age 72 and as late as age 85. You don’t have to wait till age 85, but that is the longest the IRS will allow you to defer before requiring you to take payments.
Another QLAC benefit is the ability to address future inflation with income starting when you need additional income. You can also ladder QLACs by purchasing numerous policies within the funding guidelines with income streams starting at different intervals.
During those deferral years, the dollar amount in a QLAC is not used when calculating your RMDs (Required Minimum Distributions). So you can potentially lower your taxes on your RMDs. For example, if you have $600,000 in total IRA assets, you could put $135,000 in a Qualified Longevity Annuity Contract (QLAC) under the current 2020 funding rules. You then would be calculating your RMDs on $465,000 ($600,000 – $135,00). Got it?
When those QLAC payments start, that income stream will fully satisfy the RMD requirements for the dollar amount you have in the QLAC. It's important to point out that you can’t use any “overage” from those QLAC income stream payments to use for any non-QLAC RMDs (i.e. the rest of your portfolio). That QLAC income stream only covers the RMDs for the QLAC.
Both husband and spouse can have their own QLAC, and the policy can be contractually structured so that 100% of any unused money goes to the listed beneficiaries…while the annuity company is still on the hook to pay regardless of how long you live. With this “Life with Cash Refund” structure, you are also allowed to change the payment start date (if needed) one time after the policy is issued. QLAC policy beneficiaries can be changed as well, and as many time as needed.
Future #1 Annuity Type
I believe that Qualified Longevity Annuity Contracts (QLACs) will eventually become the most popular annuity type among consumers, eclipsing Variable Annuities (VAs) and Fixed Index Annuities (FIAs) as the current top sellers.
If you have a Traditional IRA, you should get a QLAC quote on you and also on you and your spouse (if applicable) just to see what those contractual guarantees would be for your specific situation. Whether you use a QLAC for future income needs, to potentially lower RMD taxes, or to set up a joint life income stream...a Qualified Longevity Annuity Contract should be seriously considered as a part of your overall "income flooring" plan.