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What is a QLAC (Qualifying Longevity Annuity Contract)?
A QLAC is a type of fixed income annuity that has special attributes and is held in a retirement account.
#1 - RMD (required minimum distribution) exclusion. The fair market value of your QLAC is excluded from your RMD calcuations. What’s the benefit? You can keep a greater portion of your IRA (or other retirement account) intact longer while enhancing the income stream the annuity will provide in the future.
#2 - The distribution deadline. You don’t have to start taking distributions from your QLACs at age 70 1/2, but you can’t delay them indefinitely. QLAC distributions must begin no later than the first day of the month after you turn age 85.
#3 - Your investment threshold. You will be limited as to how much of your retirement savings you can invest in a QLAC. The limit will be the lesser of $125,000 or 25% of your applicable retirement account assets. The 25% limit applies on a per account basis except for IRAs, BUT the $125,000 is a cumulative limit for all QLACs in all retirement accounts. For IRAs, the 25% limit will apply to the prior year-end total of all IRAs (not including Roth IRAs).
#4 - Facts to keep in mind. QLACs cannot be variable or equity-indexed annuity contracts, though insurance companies may offer contracts with cost-of-living adjustments. QLACs cannot offer any cash surrender value. So if you buy one, just be sure you won’t be needing that lump-sum of money anytime soon!
#5 - The death benefit. QLACs can offer two death benefit options: a life annuity (the rules can vary depending on a number of factors) and a return-of-premium option. These, of course, are the potential death benefit options allowed by the tax code, but that doesn’t mean that every QLAC contract will offer all of these options.
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