Qualified Longevity Annuity Contract (QLAC)

An income annuity is a way to create a guaranteed stream of income for life. In many ways it functions like a personal pension. You provide a lump sum to an insurance company, and in return, it agrees to make regular income payments to you.

A longevity annuity is a type of income annuity in which payments begin later, allowing the premium more time to grow before income starts. A Qualified Longevity Annuity Contract (QLAC) is a specific type of longevity annuity designed for individuals who want to use only qualified savings to secure future income, with payments beginning after age 73 and no later than age 85.

Step 1: You pay a lump-sum amount using qualified funds (the premium). QLAC premiums are limited to $210,000 or 25% of your IRA holdings.

Step 2: The insurance carrier guarantees a stream of regular income payments starting after age 73 and no later than age 85.

Step 3: Payments continue for a specified period or for the rest of your life.

A Qualified Longevity Annuity Contract, or QLAC for short, is a special type of longevity annuity purchased with tax-deferred savings from your qualified retirement account. The QLAC designation, which came out of a 2014 U.S. Treasury ruling, exempts these annuities from the standard RMD rules, which force those older than 73 (previously 70½ until 2020) to withdraw a specific amount of money from their tax-deferred retirement accounts each year. As such, the QLAC has extra specific requirements to earn the designation. Here are some relevant details:

QLAC Designation

Annuities must be specifically designated as QLACs to qualify for RMD exemption. Any previously purchased annuities not labeled as a QLAC cannot be reclassified. To be a QLAC, the product cannot have any market-based features, with the exception of an inflation adjustment. There also cannot be any cash surrender value.

Premium Limits

QLAC premiums are limited to $210,000 or 25% of your IRA holdings as of December 31st of the previous year.

• If you have $840,000 or more, this means $210,000.
• If you have less than $840,000, this translates to 25% of your IRA.

These limits apply to individuals, meaning that couples with separate IRA accounts could have up to $400,000 worth of QLACs. Note that it's the insured's responsibility to make sure his/her QLAC purchase complies with the premium limitations. If the limits are exceeded, excess premium must be returned by the end of the calendar year following the purchase.

Sources of Funds

QLACs can be purchased with funds from all non-Roth IRAs, 403(b), and 457(b) plans. QLACs cannot be purchased with funds from Roth IRAs or Defined Benefit plans. If you are interested in using 401(k) funds, you may only do so once you have rolled these funds into a Traditional IRA.

Deferral Period

Deferral of income is allowed until age 85, at which time income payments must begin. To benefit from the RMD exemption, you'd also want to start income after age 73.

From the government's perspective, an annuity is a retirement savings vehicle. As such, it receives the same tax treatment as IRAs: no taxes are paid until distributions are made. The benefits are slightly different depending on whether the income annuity is funded with qualified or non-qualified funds:

The RMD is an IRS-mandated minimum amount you must withdraw from your tax-deferred retirement accounts every year starting at age 73. However, QLACs are exempt from this rule, allowing you to delay distributions until as late as age 85. By moving money out of your 401(k) or IRA and into a QLAC, you can reduce the required withdrawals and associated taxes between ages 73 and 85, allowing more of your money to work for you on a tax-deferred basis.