Among the primary concerns people have as they approach retirement is, “How long will I live and will my money last?” In addition to traditional retirement savings such as employer-sponsored retirement plans, there’s now another type of retirement account that guarantees you won’t go broke during retirement. Qualified Longevity Annuity Contracts (QLACs) allow you to invest 25% or $130,000 (whichever is less) from your IRA or 401k into this type of annuity. QLACs are different from more traditional types of annuities.
Currently, 3% of large U.S. companies offer QLACs as part of their 401k plans.
These companies see QLACs as a good option for retirees to access money after their pre-tax assets are depleted because of the guaranteed income stream they provide and the ‘late in life’ required minimum distribution (RMD) requirement.
Some retirement planners refer to QLACs as a ‘personal pension plan’ because when the annuitant starts distributions, they are guaranteed the payments for the rest of their life. QLACs are used as part of a retirement portfolio strategy because of these unique features:
- Payments can begin anytime between ages 70 ½ and 85 (The RMD age is 85)
- QLACs can be funded from a qualified retirement plan, Traditional IRA or Roth IRA, or with after-tax dollars.
- Originally designed by the Internal Revenue Service, the QLAC must meet certain requirements for it to be a QLAC.
- QLACs are not issued by every insurance company and not every annuity can be used as a QLAC
- QLACs can be ‘layered’ and funded during an individual’s working years for use in retirement.
- Since QLACs are issued by an insurance company, buyers must be aware of the financial stability of the issuer. For this reason, buying QLACs from multiple companies should be considered if part of a retirement strategy.
- Distributions are taxed at an individual’s regular tax rate
Most QLACs offer an inflation rider, which increases payments as the cost-of-living (COLA) is adjusted by the IRS at the same time Social Security payments are increased.
QLACs are a way to guarantee an income stream in retirement that you can’t outlive. If you’re interested in finding out more or which companies issue annuities that meet the IRS’s QLAC requirements, contact me for additional information.