A qualified longevity annuity contract (QLAC) is a type of deferred income annuity. With a QLAC, you’ll purchase the annuity with pre-tax funds and then receive a payment from the annuity at a later date.
A QLAC contract allows you to defer your payout period to a time in the future even further than with other types of contracts. Most annuities legally require you to start receiving an income at age 73, but with a QLAC you can wait until age 85.
Once you start receiving income payments from a QLAC contract, they’ll last for the rest of your life, helping you offset a common concern among retirees: outliving your retirement savings.
What is a qualified longevity annuity contract (QLAC) and how does it work?
A qualified longevity annuity contract (QLAC) is a type of deferred income annuity that’s generally used to provide a source of income during your retirement years. You’ll purchase the annuity using pre-tax income — such as with funds held in a 401(k) plan or IRA — and the annuity will create an income stream for you in the future.
Unlike other deferred annuities, you’ll know the exact amount of the income payments you’ll receive and the exact date when you’ll start receiving such payments.
Can you withdraw money from your annuity?
With most qualified annuities, you’ll have to take required minimum distributions (RMDs) beginning at age 73 — or age 75 starting in 2033. [1] This means you’ll have to start making minimum mandatory withdrawals from your annuity every year, and pay taxes on that money as it’ll be considered taxable income. However, a QLAC allows you to delay the start of these RDMs up to age 85.
This means you can have more time before you have to start withdrawing money from your annuity, providing yourself with an income later in life. It also means that a QLAC can help you reduce the amount of annual income for which you’ll have to pay taxes in retirement, keeping you in a lower tax bracket and allowing you to pay a reduced Medicare premium.
Learn more about other types of annuities
Accumulation period
The accumulation period is the time between when your annuity is fully paid for and when you start collecting an income. With a QLAC, this period can last several years or even decades.
During the accumulation period, your money will grow at a fixed interest rate. [2] This means that your funds will grow slowly and reliably, but you’ll forfeit on more aggressive growth you could have with a contract tied to market growth, like an indexed or variable annuity.
Learn more about fixed annuities
Annuitization or payout phase
For QLACs, the annuitization phase — the time when your annuity starts paying you back an income — comes later in life, usually starting between ages 80 and 85. Most qualified annuities, by contrast, require you to withdraw money starting at age 73.
With a QLAC, the payout phase will last for the rest of your life. In other words, you’ll receive income payments until the day you die.
Do annuities affect financial aid and other benefits?
Surrender period
There’s no official surrender period associated with a QLAC because you can’t surrender your contract. One of the key components of a QLAC is that you’ll forfeit flexibility — including the option to surrender your account. You won’t have a right to access any of your QLAC funds ahead of the schedule you agree to in your contract without paying large fees.
Can you lose money in an annuity?
Fees & penalties
If you do need to withdraw funds from your QLAC outside of the determined pay schedule, you’ll pay a 10% fee on any money you withdraw. This will be in addition to the income tax you’ll pay on those funds.
What is the impact of interest rate changes on your annuity?
Guarantees & riders
One of the benefits of a QLAC is that your money is guaranteed to grow at a fixed interest rate. [3] Once you purchase the annuity, your money will grow at a predetermined rate, regardless of market fluctuations.
This fixed rate of growth may not keep up with inflation. One common rider that you can add to a QLAC to protect against this is a cost of living adjustment (COLA) rider. A COLA rider will ensure that your annuity’s growth will keep up with inflation. While COLA riders are technically free, the payments you receive from your annuity will be lower, at least initially.
Another valuable rider you can add to a QLAC is the death benefit rider — also known as the return-of-premium rider — which guarantees that if you die during the annuitization phase, any remaining money in your annuity will be paid to any loved ones you name as your chosen beneficiaries on your contract. Without this rider, any remaining money in your annuity could go to the insurance company. There’s typically an additional fee for adding a death benefit rider to your annuity.
Tax implications
With a QLAC, you can minimize the amount of taxes you’re required to pay. “One of the main benefits of QLACs is that you can purchase them with qualified money,” says Amy Shirk, sales agent at Policygenius. Qualified money is money you’ve earned that hasn’t yet been subject to income tax. You’ll purchase the annuity with pre-tax income, and won’t have to pay income tax until the annuity disburses your money.
For most people, you’ll collect a smaller income during retirement — when you’re collecting your annuity payments — compared to your working years — when you’re funding your annuity. If this is the case for you, this means you’ll pay less money in taxes if you aren’t taxed until your annuity pays you an income.
But if you want to reduce your tax liability in retirement even further, a QLAC contract can help you reduce your taxable income as well. It will delay the moment you have to start taking RMDs up to age 85 instead of age 73 — but the amount of qualified funds you can contribute to a QLAC has a cap, which we’ll discuss below.
Can annuities be used as a collateral for a loan?
Limitations
One of the main limitations of QLACs is the amount of money you can invest in them — only $200,000 combined (adjusting the limit annually for inflation), regardless of the number of QLAC contracts you have. [4] If you’re looking for a way to reduce your tax liability in retirement or delay making RMDs, keep in mind that you’ll only be able to turn up to $200,000 in qualified funds into a QLAC.
Due to its limitations, a QLAC is typically best used as a supplement of your overall retirement plan, but it won’t be enough to provide for all of your needs. Using a QLAC can be helpful to complement other sources of retirement income, such as Social Security, a 401(k), IRA, or other annuities.
Learn more about how annuities work
What are the different types of QLACs?
There are two types of qualified longevity annuity contracts, distinguished by how they pay out: Life only or life with cash refund.
Life Only. This type of QLAC ensures that you’ll never outlive your annuity. Your QLAC will continue to pay you an income as long as you live, but when you die, payments will cease and no money will be left to your loved ones.
Life with cash refund. This type of QLAC ensures that you receive back all of the principal you paid to purchase the annuity. You’ll receive premiums for life, but if you die before receiving all of the money back, the remainder will be left to your beneficiaries. Your payments will be less than a life only QLAC, but you’ll also be guaranteed to get your principal paid back to you (or your loved ones).
What are the pros & cons of QLACs?
While QLACs can be a useful tool for some people, it’s important to consider the pros and cons before you purchase one as part of your retirement planning.
Pros
Simplicity and reliability. A QLAC is a straightforward and easy-to-understand product. You’ll know how much the annuity costs, how it’ll grow, how much of an income you’ll receive, and when you’ll start receiving income payments.
Tax benefits. You can use a QLAC to minimize the total amount of income tax you’ll pay in retirement.
Delayed required minimum distributions (RMDs). Most annuities are required to start paying you an income by age 73, but with a QLAC, you can defer these withdrawals until age 85.
Cons
Loss of liquidity. With a QLAC, you’ll use qualified savings to purchase your annuity, and that money will be distributed to you at an agreed-upon schedule. But you can’t deviate from this schedule without paying steep financial penalties.
Limited protection against inflation. Your annuity will grow at a predetermined interest rate, but this rate is fixed, and might not adjust based on inflation — unless you add a cost of living adjustment (COLA) rider, which could potentially reduce the amount of your income payments.
Investment limits. You can’t put more than $200,000 into a QLAC. [5] You may need to set up other income streams to supplement any money you’ll get from a QLAC.
What should you consider before buying a QLAC?
A QLAC is a unique product that’s not suited to everyone. It’s best for people who have a significant amount of money saved for retirement and can wait until they’re in their 80s to start collecting an income from their annuity.
A QLAC “allows you to defer a required minimum distribution (RMD) on the money that is placed in” the contract, says Tony Boyden, learning and development partner at Zinnia. Most annuities require you to collect an income by age 73. If you want to delay this required distribution time, a QLAC can be a useful tool for you.
Here are other factors to consider before buying a QLAC.
Your age
Even though anyone age 18 to 75 can buy them, QLACs are best for older people because you can wait longer to start collecting an income from your annuity. Most annuities require you to collect an income starting at age 73, but with a QLAC, you can wait until age 85 to start collecting an income.
Your investment goals
A QLAC is a fixed annuity, which means that it won’t yield the same aggressive growth as an indexed or variable annuity. With a QLAC, you can expect a reliable but low rate of growth for the duration of your annuity.
Your risk tolerance
QLACs are best suited to people with a low risk tolerance. The money placed in a QLAC will grow at a fixed interest rate. This means that you can expect a small but guaranteed amount of growth, although you’ll miss out on more aggressive growth that you could get by investing in an annuity tied to the market.
Are annuities a good investment?
Who should consider a QLAC?
A QLAC can be a good option if you have money in a qualified account like a 401(k) and want to delay the disbursement of those funds beyond age 73. This means you’ll probably have other sources of income for retirement and you expect to live into your 90s.
If this applies to you, allotting a portion of your retirement savings to a QLAC can help you optimize your financial plan during retirement.
How does an annuity fit into your overall retirement plan?
