What is a Qualified Longevity Annuity Contract or QLAC?


By Daniel Heffernan
September 2017


One of the biggest fears expressed by clients approaching retirement is the fear of outliving their retirement portfolio – in other words running out of money. “Longevity risk” as it is called, is real and it is something that as financial planners, we are acutely aware of when developing a distribution plan.

One strategy offered by the IRS to help combat this risk is something called a “Qualified Longevity Annuity Contract” or QLAC for short. Introduced in 2014, QLACs help to reduce longevity risk by providing a guaranteed stream of income beginning sometime in the future, lasting for a contract holder’s lifetime. These annuity contracts have some very specific rules however, and the benefits can only be achieved if the IRS rules are followed.

QLACs are retirement annuity products, and therefore must be funded with qualified retirement assets (IRA, 401k, etc.). The IRS allows the investor to withdraw 25% - up to a maximum of $125,000 for single folks and $250,000 for married couples - from their qualified retirement accounts and exempt these funds from being considered in their RMD calculation from age 70-1/2 onward by investing them in a QLAC. The QLAC can be purchased at any age, and allows deferral of income up to age 85, at which time the insured must begin to take income (annuitize). These payments are for life, and are shielded from stock market downturns. For those that are looking to reduce their RMD for tax purposes, and instead have more predictable income later in retirement, this can be an excellent fit. Additionally, for those looking to protect a spouse, survivorship options such as a “cash refund” or “joint annuity income” option can be selected when the QLAC is initially purchased.

You must keep in mind that purchasing a QLAC is an irrevocable decision, and no withdrawals are allowed. Once you fund the annuity, you cannot change your mind, and you cannot tap into the QLAC if you need money. The rules are strict! A QLAC won't save you a ton in taxes on its own, but it offers you one more weapon in your arsenal of tax saving and planning strategies. Remember, this is insurance; it's not meant to make you rich, but rather to provide you with a secure source of future income.

* Tax-qualified contracts such as IRAs, 401(k)’s, etc., are tax deferred regardless of whether or not they are funded with an annuity. If you are considering funding a tax-qualified retirement plan with an annuity, you should know that an annuity does not provide any additional tax-deferred treatment of earnings beyond the treatment by the tax-qualified retirement plan itself. However, annuities do provide other features and benefits such as income options including the type of lifetime income guarantees provided by a QLAC.

This information is general in nature and may be subject to change. Commonwealth Financial Network is not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your situation, consult your professional attorney, tax advisor or accountant.

Guarantees are backed by the claims-paying ability of the issuing insurance company.