“For those worried about outliving their savings, a qualified longevity annuity contract, or QLAC may be an excellent choice.”- Norm Garner
Many pre-retirees question whether or not their retirement savings will be enough to last them a lifetime. Nearly everyone who thinks about retirement asks themselves if they have saved enough to maintain a decent lifestyle when they no longer work.
Advanced medical technology may one day offer accurate predictions for how long a particular individual will live. Unfortunately, for the moment, all we can do is guess. Not knowing exactly how long we will live without a paycheck means it’s challenging to ensure we’ve saved enough. Increased life expectancies, inflation, the disappearance of private pensions, and concerns about Social Security are all potentially erosive forces that can and will affect your retirement savings.
If you are still employed but nearing retirement age, you might consider Qualified Longevity Annuity Contracts or QLACs. QLACs are unique kinds of annuity contracts designed to solve longevity concerns. Introduced by the IRS in 2014, QLACs allow retirees to use their qualified defined contribution plans, such as traditional IRAs or 401ks, to fund a lifetime income stream.
Pre-retirees choosing QLACs cite the favorable tax treatments they receive as a primary factor in their decision. Additionally, a QLAC provides a degree of flexibility when deciding when to begin getting your payments. A QLAC lets you move distributions beyond the usual recommended mandatory distribution (RMD) age of 72. QLACs allow you to defer taxes until later, up to a maximum age of 85.
Other QLAC features include:
- The ability to purchase your QLAC with the lesser of 25% of your retirement funds or $135,000).
- Money in a QLAC doesn’t count in RMD calculations until the annuity start date.
- Your starting date for payouts can be as late as one month after you reach age 85. Doing this will reduce your recommended minimum distributions.
- QLACs allow you to choose either an individual or joint lifetime payout. A joint lifetime payout means that your surviving spouse will receive payments for the rest of their life when you die.
- You are required to buy a QLAC from an insurance company. The contract must clearly state that it is a QLAC, and it cannot contain any commuted benefit features such as cash surrender rights or lump-sum distribution options.
- Roth IRA money cannot fund QLACs.
- Extra money used to purchase a qualified longevity annuity contract may disqualify the QLAC contract unless you immediately return that money to your IRA.
Bottom line: QLACs may work for some people, but they are not a good fit for everyone. However, if you participate in a qualified plan such as a 401k or traditional IRA and are concerned about outliving your retirement money, a QLAC could be a wise choice.
QLACs are somewhat complicated, with many rules and guidelines. It would be best to know and understand all the rules and features. You and your advisor should also discuss whether you’ll be comfortable with deferring income and relinquishing control of your investment. Before committing to a QLAC, always consult a retirement income and annuity expert who help you determine