QLAC Limit Increased Effective January 1, 2018
- A QLAC is a special kind of longevity annuity that allows you to defer RMDs.
- You can defer RMDs to as late as age 85 by converting a portion of your 401(k) or IRA to QLAC.
- The QLAC limit (maximum amount you can convert) is now $130,000, effective 1/1/2018, up from $125,00 since the QLAC was created in 2014.
The QLAC limit has been updated! Effective January 1, 2018 you can convert $130,000, up from $125,000, of your 401(k) or IRA into a QLAC. A Qualified Longevity Annuity Contract (QLAC) is an annuity that receives special tax treatment from the IRS. It’s the only way to purchase guaranteed retirement income while also deferring required minimum distributions (RMDs) within your 401(k) or IRA. That means with a QLAC, you don’t have to take the full RMDs starting at 70½, instead pushing back a portion of them back until as late as age 85.
The IRS imposes premium limits on QLAC purchases because of their special tax treatment.
A 2014 U.S. Treasury ruling exempted certain longevity annuity (a.k.a. deferred income annuity) products from the standard required minimum distribution rules, which force those older than 70½ to withdraw a specific amount of money from their tax-deferred retirement accounts each year. This ruling created the QLAC designation.
For the first time since the ruling came out, we are seeing an increase in the QLAC limit. The previous QLAC limit of $125,000 has been increased to $130,000 effective January 1, 2018. The increase in the QLAC limit was expected because the original ruling contemplated periodic increases to account for the impact of inflation.
The $130,000 QLAC limit applies to those with $520,00 or more in their IRA or 401(k). If you have less than $520,000 in your IRA or 401(k), you can’t use more than 25% of those assets to buy a QLAC. This is calculated based on your balance as of December 31st of the previous year. If you have $520,000 or more in those assets, you can use up to $130,000 to buy a QLAC. Here’s a link to an IRS document with the new QLAC limits.
Here are some FAQs about the QLAC and the recent change.
What’s the QLAC?
A QLAC is a type of deferred income annuity purchased inside of your 401(k) or IRA. With such products, an individual or couple will pay a premium — all at once or over time — and elect when to receive the income. The insurance company, in return, agrees to provide a predetermined, guaranteed monthly payout for life. You can think of it like a pension you buy for yourself.
What was the old QLAC limit?
It used to be the lesser of $125,000 or 25% of your 401(k) or IRA account balance.
Other than the QLAC limit on premium, what makes a QLAC a QLAC?
- QLAC designation: Annuities must be specifically designated as QLACs to qualify for this special treatment. If you bought a product that wasn’t labeled a QLAC, it can’t be reclassified.
- Fixed payouts: A QLAC cannot have any market-based features, with the exception of an inflation adjustment feature. This means that payouts must be predetermined. If you want your payouts to go up if the stock market goes up, for example, a QLAC isn’t for you.
- Deferral limits: You can defer payments until you’re 85.
If I bought a QLAC already, what does that mean for me?
It means that you likely have three options assuming your 401(k) or IRA balance (including the premium paid already into the QLAC) is at least $520,000. First, you could do nothing. Second, you could add $5,000 to your existing policy. Finally, you could buy a $5,000 QLAC from a new insurer if you wanted to spread out your purchases or take advantage of better pricing.
Which insurers offer the QLAC?
About ten insurers currently offer the QLAC. You can see a full list here.
Which insurers offer QLAC purchases of as little as $5,000?
Currently, only New York Life and Guardian offer purchase sizes this small.
When should I expect the limits to increase again?
It depends on the pace of inflation, but probably 2-4 years for another $5,000 increase.
Where can I read the IRS announcement about the QLAC?
Here’s the IRS document announcing the change. There’s only a brief mention of the QLAC and the exact language from that document is as follows: “The dollar limitation on premiums paid with respect to a qualifying longevity annuity contract under § 1.401(a)(9)-6, A-17(b)(2)(i) of the Income Tax Regulations is increased from $125,000 to $130,000.” The press release announcing the QLAC can be found here.
Where can I learn more about the QLAC?
Here are links to some of the other articles in our resource center:
- What’s a QLAC? A Qualified Longevity Annuity Contract (QLAC) is a pension-like product you can purchase with qualified savings that will provide you income for as long as you live. We’ve outlined the key components of QLACs and how they work here. Read more…
- The Financial Value of a QLAC. A QLAC is not only financially valuable, but it offers something traditional investments cannot: peace of mind. We’ve laid out how to determine your financial return from a QLAC. Read more…
- Should You Buy a QLAC? A QLAC offers you a guaranteed income stream to give you peace of mind during retirement. We’ve created this quick checklist so you can know if a longevity annuity is a good fit for you. Read more…
- The Pros and Cons of a QLAC. QLACs have many financial benefits which make retirement planning simpler. But, it’s important that you know all they have to offer to determine if it’s right for you. Read more…