Understanding a Qualified Longevity Annuity Contract (QLAC) is important for a fulfilling retirement because one of the biggest fears many people have as they grow older is outliving their money. A QLAC is an investment vehicle that allows funds in a qualified retirement plan, such as a 401(k), a 403(b), or an IRA, to be converted into an annuity.
An annuity is a contract purchased from an insurance company in which the buyer pays the insurance company either a lump sum or a series of premiums.
At some point in the future, the insurance company pays back the annuity owner—called the annuitant. How many years the owner receives payments depends on the type of annuity purchased.
A qualified longevity annuity contract (QLAC) provides a lifetime of income once the preset annuity start date is reached. The longer an individual lives, the longer a QLAC pays out.
One of the benefits of using IRA funds to purchase a QLAC is that it helps to avoid violating the IRS RMD rules for those turning age 72.
A required minimum distribution (RMD) is the minimum amount that must be withdrawn—per the IRS—from a person’s retirement account balances each year starting when he turns 72 years old.
A QLAC allows for a transfer of IRA funds to be used to purchase the annuity.
Since a QLAC is a deferred annuity, the product allows distributions to be delayed until a future date but no later than the person’s 85th birthday.
In other words, the amount that has been transferred to buy the QLAC doesn’t have any required minimum distributions until the predetermined payout date for the annuity.1
Another benefit of a QLAC is that it allows a spouse or someone else to be a joint annuitant, meaning that both named individuals are covered regardless of how long they live (with some conditions).
In effect, QLACs act as longevity insurance. As such, they are a valuable tool in retirement income planning.
The IRS sets an annual maximum amount that can be used to purchase a QLAC using IRA funds.
In 2020 and 2021, an individual can spend 25% or $135,000 (whichever is less) of their retirement savings account to buy a QLAC via a single premium.
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