QLAC
What is a QLAC?
A QLAC is a type of longevity annuity (an insurance product purchased up front in exchange for a guaranteed stream of income that will begin at some point in the future and last for the rest of one’s life), that allows the insured to withdraw 25% — up to a maximum of $135,000 for single people and $250,000 for married couples — from their qualified retirement accounts and exempt these funds from being considered in their RMD calculation from age 72 onward. Purchase payments are limited to the lesser of either $135,000 (subject to IRS cost-of-living adjustments in future years) less purchase payments paid for another QLAC contract –OR– 25% of all IRA account balances owned by the proposed Owner/Annuitant less purchase payments paid for another QLAC contract.
Why would a client need a QLAC?
It can help to reduce RMDs, manage taxes, hedge against longevity risk, better manage other assets and offset later-year reductions from other income sources. It can also cover unexpected expenses, such as healthcare costs that may increase during retirement, and supplement possible reductions in income due to the death of a spouse (for example, pension or Social Security benefits).
Essentially, by purchasing a qualified longevity annuity contract, you can defer the distribution of a portion of your qualified assets beyond 72, reducing your RMDs until a later date.
Who needs it?
Clients concerned about higher healthcare cost in later years, who claimed social security early and looking for a boost in income, clients looking to supplement reduction in income due to death of spouse, or those looking to possibly lower RMDs.
- Age 60+ (probably: mid-to-late 60s)
- $500,000+ in IRA assets
- Doesn’t need RMD income from QLAC assets at age 70½ Focus on:
- Tax management
- Greater income in later years
- Guaranteed lifetime income
How best to approach/sell to your clients?
QLACs are one of the few qualified investment options that offer the opportunity to defer distribution of assets to a later date, therefore allowing you to defer paying taxes on a portion of the money you may need in early retirement. The difference of reducing your RMDs for just five years could have a significant impact in extending your retirement savings. It can help ensure your savings last for the 30 or more years you could spend in retirement. It can also create an opportunity to leave more assets for your heirs, if that is a retirement goal.
Where it might not always apply?
Purchasing a QLAC is an irrevocable decision. Once you fund the annuity, you cannot change your mind. Also, purchasing a deferred income annuity may result in a loss in potential future earnings as well as some liquidity. Being a fixed annuity, the growth potential is small. However, in exchange for this, you reduce the risk of loss due to a market downturn and guarantee a future lifetime income stream.
Key definitions & things to consider
If you have IRA assets, you can purchase a Deferred Income Annuity as a QLAC. This fixed-rate deferred income annuity gives you the opportunity to create your own personal pension plan — something that may not be available to you through your employer. The details below explain more:
- Contributions are limited to the lesser of $135,000 or 25% of the individual’s total prior
- year-end (12/31) IRA balances
- You can purchase a QLAC at any age through age 82
- You must begin taking distributions no later than the first day of the month following the month you reach age 85
- A return of premium death benefit is available during the deferral period before income payments begin
- Income options can be single or joint life, either life income or life income with cash refund