Qualified Longevity Annuity Contracts (QLACs): Eligibility and Savings Potential

By: Mahendra S. Rathore. MBA, MA, BA (Honors) CFP? CRPC? ChFC? CLU? PMP? CHE? CIMA, CHA? SAFe Scrum Master?

What is a QLAC?

A Qualified Longevity Annuity Contract (QLAC) is a deferred income annuity funded with assets from a qualified retirement account, such as a 401(k), 403(b), or traditional IRA. It provides a guaranteed income starting at a future date, typically later in retirement, such as age 75 or 85. QLACs help manage longevity risk by ensuring you don't outlive your retirement savings.

Eligibility for a QLAC:

1. Retirement Accounts: You can purchase a QLAC using funds from: Traditional IRAs 401(k)s 403(b)s Other qualified retirement plans
2. Age Requirement: You must be at least 18 years old and below the required minimum distribution (RMD) age to purchase a QLAC.
3. Tax-Deferred Accounts: QLACs are only available for tax-deferred retirement accounts, not Roth IRAs.

Contribution Limits for QLACs (2024)

1. Lesser of $200,000 or 25% of Retirement Account Balances: You can allocate up to 25% of the total balance across all eligible accounts, capped at $200,000. The $200,000 limit is indexed for inflation and may increase over time. If you have multiple qualified accounts, the 25% limit applies individually to each account.

?Example Calculation:

·??????? If your total eligible retirement account balance is $800,000:

o?? 25% of $800,000 = $200,000.

o?? You can invest up to $200,000 in a QLAC.

·??????? If your account balance is $300,000:

o?? 25% of $300,000 = $75,000.

o?? You can invest up to $75,000 in a QLAC.

Benefits of a QLAC:

1. Delay Required Minimum Distributions (RMDs): QLAC funds are excluded from RMD calculations until income payments begin.
2. Guaranteed Income for Life: Provides predictable income to cover essential expenses in later years.
3. Tax-Deferred Growth: Funds grow tax-deferred until income payments start.
4. Longevity Risk Management: Ensure a stream of income if you live longer than expected.

5.??? Annual Dividends Help You Keep Pace with Inflation:

If you purchase a QLAC from a mutual insurance company, you may receive annual dividends, typically ranging from 7% to 10%. These dividends can help offset inflation. For example:

o?? Inflation Rate: 3% <Dividend Rate: 8%> = Net Gain: 5% extra after accounting for inflation. Dividends provide an added layer of growth, ensuring your retirement income retains its purchasing power over time.

How Much Can You Save for Retirement with a QLAC?

The amount you can save depends on your retirement account balances and how much you allocate to a QLAC. Here’s how QLACs fit into your broader retirement savings strategy:

6.??? Diversification:

o?? Use QLACs for guaranteed income, supplementing other investments like stocks, bonds, and real estate.

7.??? Future Income Projections:

o?? A $200,000 QLAC purchased at age 65 could provide annual income of $30,000–$50,000 starting at age 85 (depending on interest rates and the provider’s terms).

Steps to Apply for a QLAC

1.??? Evaluate Your Needs:

o?? Assess your future income gaps and determine if a QLAC fits your plan.

2.??? Consult a Financial Advisor:

o?? Collaborate with an advisor to understand the impact on your retirement portfolio.

3.??? Choose a Provider:

o?? Compare terms, rates, and options from mutual companies & insurers.

4.??? Purchase the QLAC:

o?? Allocate funds from your qualified retirement accounts, adhering to the contribution limits.

?Disclaimer:

The information provided in this blog is for general informational purposes only and should not be considered as financial, legal, or tax advice. Readers are encouraged to consult with a qualified financial advisor, tax professional, or attorney to assess their individual circumstances before making any financial decisions. While efforts are made to ensure the accuracy and timeliness of the content, no guarantees can be made regarding the completeness or reliability of the information presented. Financial products, tax laws, and regulations are subject to change, and the strategies discussed may not be suitable for everyone. The author and publisher of this blog assume no responsibility or liability for any errors, omissions, or outcomes resulting from the use of this information.