KEY TAKEAWAYS

  • A QLAC is a retirement strategy in which a portion of the required minimum distributions (RMD) is deferred until a certain age (maximum limit is 85). The insurer takes on market and interest rate risk.
  • Under current rules, an individual can spend 25% or $135,000 (whichever is less) of their retirement savings account or IRA to buy a QLAC.
  • The main benefit of QLAC is a deferral of taxes that accompanies RMDs.
 
 

Qualified Longevity Annuity Contract and Taxes

QLACs have the added benefit of reducing a person’s required minimum distributions, which IRAs and qualified retirement plans are still subject to even if an individual does not need the money. This can help keep a retiree in a lower tax bracket, which has the added benefit helping them avoid a higher Medicare premium. Once a retiree’s QLAC income begins flowing, it could increase their tax liability. However, if managed correctly any additional tax liability can be minimized if other taxable retirement savings income sources are spent down first.

 

The promised benefit of QLACs can only be achieved if rules set by the IRS are followed. The annual distribution is based on the value of the account at the end of the preceding year.

 

Qualified Longevity Annuity Contract Considerations

One option for getting the most out of QLACs is by laddering them, meaning buying several smaller contracts (in the $25,000 range, for example) over several years. Such a strategy is like dollar-cost averaging, which makes sense given that annuity costs can fluctuate along with interest rates.

QLAC buyers are often given the option of adding a cost of living adjustment to their contract, which indexes the annuity against inflation. Deciding on this depends on life expectancy, since the cost of living adjustment will reduce the QLAC’s initial payout.
The biggest risk of buying a QLAC is the financial strength of the issuing company. If they go bankrupt the QLAC may not be enforceable. QLAC buyers should consider buying more than one from different issuers to limit their risk.Example of QLAC


Example of QLAC

John is 67 and is due to retire in three years. He would like to save on tax liabilities from her RMDs. Based on her current retirement account balances, he is due to receive $7,000 RMD monthly from his IRA account, once he reaches 70.5 years.

 

But John has other plans. He has made investments in other assets, such as stocks and bonds and real estate, which should provide him with an income stream post-retirement. Besides this, he plans to consult on a part-time basis to stay current in his field and earn extra cash. All in all, he expects to lead a lifestyle that is comfortable and not lavish, post-retirement.

 

To make adequate preparations for his old age, he invests $100,000 in a single premium QLAC account from his IRA savings account that he plans to withdraw when he turns 85. This will set back his RMD withdrawal date by 18 years but it will add $10,000 to the amount he collects.