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Examining Qualifying Longevity Annuity Contracts in 5 Easy Steps

Running out of money in retirement is a common fear among pre-retirees and retirees. With longer life expectancies, market volatility and rising healthcare costs, funding a retirement that could last many years can be an overwhelming prospect. A qualifying longevity annuity contract, or QLAC, can help alleviate this concern by providing a predictable stream of income in retirement that is insulated from market downturns.

A QLAC is a type of fixed income annuity that is held in a retirement account, such as an IRA. While QLACs can be a great option, they also come with certain rules you will want to consider.

Examining Qualifying Longevity Annuity Contracts in 5 Easy Steps:

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 $130,000 or 25% of your applicable retirement account assets. The 25% limit applies on a per account basis except for IRAs, BUT the $130,000 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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