What is a QLAC?
Chances are a QLAC is not something you’ve heard of but over time that may change. It stands for Qualified Longevity Annuity Contract and it’s a relatively new investment option. The term “qualified” may be a tip off to some that it is a type of retirement account investment. That is true. It was designed to address the increasing concern of many Americans that with Social Security estimated to run dry by 2034 unless Congress addresses the problem (and nothing going on in Washington right now gives hope that they will any time soon) they need to look to other ways to try to guarantee a lifetime stream of income.
In 2014 the IRS amended the required minimum distribution (RMD) rules, providing more flexibility for owners of qualified (tax deferred) accounts to the extent they are invested in QLACs. The RMD rules are the pesky requirements that make retirement account holders take a minimum amount out of their accounts starting in the year they turn 70 and ½ so the federal and state governments can get their tax on all the interest and growth in the accounts that have built up, in many cases, for years.
Let’s first review what exactly is a QLAC. It is an annuity purchased from an insurance company with a portion of your retirement account. There is a limit to what you can put into a QLAC, 25% of your account balance or $125,000, whichever is less. A QLAC is a deferred income annuity. The annuity guarantees a set income for a set period of time, in some cases for life. The attractiveness of this arrangement is that you know how much income you will get and for how long no matter what happens to interest rates or the financial markets. The insurance company selling you the annuity assumes those risks. You get certainty of knowing exactly how much income you can expect.
The IRS relaxed the RMD rules as they relate to QLACs so that if I delay receiving income on my QLAC till as late as age 85 I don’t have to count the QLAC amount in determining my RMD. In other words, I can delay paying taxes on the QLAC until I reach age 85 instead of 70 and ½ as with all other retirement accounts.
Sounds great, right? Well, of course it’s not that simple. It never is. First of all, not all longevity annuities are QLACs. Additionally, there is never a one size fits all solution. A QLAC might be a good alternative for some and not for others. There are also drawbacks to be aware of.
We’ll attempt to address some of those questions next week so stay tuned.