Qualified Longevity Annuity Contract (QLAC)

A Qualified Longevity Annuity Contract (QLAC) is an annuity that provides income for life and can be used to fund retirement.  They are designed to help people who want to continue receiving income after they retire but don’t have the funds needed on hand. QLACs can provide income for life and are one of the only ways to pass retirement savings onto your heirs.

Benefits of QLACs

QLACs offer several benefits, including: Benefits_of_QLACs Increased income in retirement. Retirees can continue to receive income after they retire. Also, retirees can receive income payments that are higher than SS or IRA withdrawals. Flexible payment options. The annuity owner has the option of receiving a lump sum, periodic payments and/or payments for life. They also have the ability to access funds without penalty as long as it’s done in accordance with IRS rules. RMD deferral. QLACs allow retirees to defer required minimum distributions (RMD) until they turn 85. Income for your spouse. QLACs allow a spouse to continue receiving income after the original annuity owner passes away. Principal Protection. QLACs allow annuity owners to preserve their savings and receive guaranteed income payments.

Who Will Benefit From QLAC?

QLACs can provide retirement income for:

  • Retirees who don’t want to spend down their savings in a short period after retiring.
  • Anyone with money saved in qualified plans, such as 401(k) and 403(b), that do not offer required minimum distributions.
  • People who want to be able to pass their retirement savings on to heirs instead of cashing them out and paying taxes and penalties.

How Does a QLAC Work?

A qualified longevity annuity contract (QLAC) is an agreement between you, your financial professional, and an insurance company – with IRS rules guiding all of it.  The funds used for this type of retirement plan are not subject to the typical withdrawal restrictions, so you can withdraw them at any time without penalty. The QLAC allows you to sidestep required minimum distributions associated with traditional IRAs, 401(k)s, and other qualified retirement plans.  This is why they may be appealing for some investors who want their money to grow tax-deferred until it’s time to receive payments from an annuity contract issuer on a specific date or at regular intervals as set out in the agreement between investors/providers of funds.

Example of QLAC

For example, Peter, who is 85 years old. Peter kept up with the latest trends in his field and worked as a consultant for most of his career. He also taught at two universities part-time, earning extra income throughout his working years. By age 70, he retired from one job (continuing to consult) but stopped teaching after suffering several health problems that required surgery and rehabilitation therapy. Peter lived a frugal lifestyle and invested his savings in high-quality bonds. He paid little attention to the stock market over the years, but he was pleased with how well his investments did during one of history’s worst financial crises.  As a result, Peter has about $500,000 saved for retirement while living on social security benefits. Peter used his IRA savings to purchase a single premium QLAC for $100,000. The agreement would pay him an income stream of at least $25,000 per year starting when he turns 85 years old (15 years after the QLAC was purchased). The guaranteed minimum payment is wanted by Peter because it provides some level of certainty for his income needs.  This can be important because he’s not sure how long he’ll live and the $25,000 per year may not last as long as Peter does. On top of that, upon reaching 85 years old (when QLAC payments begin), Peter will stop receiving RMDs from his IRA accounts (since money was used to purchase the QLAC).  This will make his RMDs lower and ensure more of his IRA savings can be passed on to heirs.

When Should You Begin Collecting QLAC Income?

QLAC distribution rules vary according to the type of plan you have. There are two types: immediate and  that allow retirees to receive payments at specific times or on a set schedule. The IRS sets forth three different payout options for annuity contracts, depending on the circumstances:

  • Immediate annuity distributions must begin no later than one year after the contract is issued.
  • Deferred fixed immediate annuities allow for payments to start at a specified date
  • Fixed deferred annuity allows you to defer when you will receive your income until a specific date

When you reach the age of 85, your contract issuer will begin withdrawals from annuity contracts that are immediately fixed or deferred even if you have not reached 60 years old.  These distributions must be made on an annual basis and may continue for life or until all funds in the account are depleted.  For deferred income annuities, the issuer is required to begin payments no later than five years after the policy was issued. If you want a guaranteed life income payment from your contract, it will have a term certain option that guarantees a minimum payout period.  For example, if you purchase an immediate deferred fixed annuity and select a 20-year term certain option, the income payments will continue as long as you are alive for 20 years. If you die before the term is over, your spouse or heir(s) will receive a guaranteed payment up to that point and any remaining balance can be paid out at their discretion.  If there isn’t an option available (e.g., immediate fixed annuity), your contract issuer is not required to make payments if you die before reaching the age of 85.

Key Takeaways

QLACs can provide an excellent income source for retirees who want a guaranteed income stream that is not subject to the ups and downs of the stock market. The primary benefit of QLACs is their guarantee; you will receive regular payments (typically monthly) until death.  This allows individuals, with limited retirement resources and health issues, to have an income source that is not dependent upon their long-term health. QLACs are complex financial products, so it’s important to consult with a trusted advisor who specializes in this area before making any decisions about your retirement investments. As age increases, you become more susceptible to adverse market conditions, and the risk of outliving your savings becomes higher.  A QLAC can help retirees like Peter limit their risk exposure by providing a guaranteed, fixed income stream with an option to have payments continue for life or for a set period of time.

A QLAC is an IRS-approved, tax-deferred financial product that provides retirees with guaranteed income for life. As the name implies, these products are designed to provide retirement income for individuals who are elderly or retired, while minimizing exposure to market fluctuations.
The primary benefit of QLACs is their guarantee; you will receive regular payments (typically monthly) as long as you live. This allows individuals like Peter, with limited retirement resources and health issues, to have an income source that is not dependent upon their long-term health.
A QLAC is a complex financial product, so it's important to consult with a trusted advisor who specializes in this area before making any decisions about your retirement investments. As age increases, you become more susceptible to adverse market conditions, and the risk of outliving your savings becomes higher. A QLAC can help individuals limit their risk exposure by providing a guaranteed, fixed income stream with an option to have payments continue for life or for a set period of time.
The primary disadvantage of QLACs is that they typically provide lower returns than other retirement savings products, such as mutual funds. QLACs are also subject to the risk of mortality charges which could reduce or eliminate your income stream if you die before receiving all of the benefits paid for by your contract.
No, however withdrawals before age 59½ may be subject to taxation and a possible penalty.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.