When planning for retirement, ensuring a steady income stream is crucial, especially as expenses may grow with age. A Qualified Longevity Annuity Contract (QLAC) might be a valuable tool to address this need. Here’s a breakdown of how QLACs work, their benefits, and how they fit into a broader retirement strategy.
What is a QLAC?
A QLAC is a type of deferred income annuity (DIA) funded with assets from a traditional IRA or qualified retirement plan like a 401(k) or 403(b). Introduced by the U.S. Treasury in 2014, QLACs allow retirees to defer taking required minimum distributions (RMDs) from these funds, which typically start at age 73. With a QLAC, you may delay income payments up to age 85, providing flexibility for those who don’t need immediate access to their retirement funds.
Why Consider a QLAC?
Many retirees face the challenge of balancing withdrawals with the need to preserve their savings for later years. A QLAC offers several advantages:
- Deferred Income: You may defer income beyond the standard RMD age, offering financial security in your later years.
- RMD Reduction: Funds allocated to a QLAC are excluded from RMD calculations, potentially lowering your taxable income.
- Guaranteed Lifetime Income: Once income payments start, they continue for life, regardless of market conditions.
How It Works
When you purchase a QLAC, you select a future date to begin receiving payments. For example, someone at age 65 might choose to start payments at age 80. The longer the deferral period, the higher the income payments, due to the power of compounding.
Under the SECURE Act 2.0, the maximum amount you may invest in a QLAC increased to $200,000, simplifying funding rules and making QLACs more accessible.
Key Considerations
- Single vs. Joint Life: You may choose between a single-life or joint-life QLAC. A joint life option ensures payments continue as long as one spouse is alive, albeit at a slightly lower payout.
- Income Start Date: Your start date should align with your overall retirement income needs. For example:
- A retiree anticipating higher health care costs at age 85 might delay payments until then.
- Someone with temporary income sources expiring at age 75 may prefer to start payments at that point.
Is a QLAC Right for You?
Deciding to purchase a QLAC depends on your financial situation and goals. If you expect to need additional income in your later years and want to minimize RMDs in the interim, a QLAC may be an effective strategy. However, these contracts are irrevocable, so careful planning is essential.
Final Thoughts
As life expectancy increases, planning for later-in-life income becomes more critical. QLACs offer a way to ensure financial stability in your golden years, providing peace of mind and a guaranteed income stream. When considering a QLAC, consult a trusted financial advisor to tailor this option to your needs and retirement goals.
Pro tip: Start exploring QLAC options well before you turn 73 to maximize your strategy and ensure a smooth transition into retirement income planning.
