A Qualified Longevity Annuity Contract (QLAC) is a special type of Deferred Income Annuity that comes with tax-deferred savings and is funded from a qualified retirement account or IRA. It is also known as a deferred income annuity, as it lets you defer payments so that you can benefit more in later years. The more you defer your payments, the higher the payments insurance companies will pay out to you when you start receiving payments. You are eligible to defer your income until the age of 85 and avail yourself of the benefits of the policy through either a 401(k) or IRA.
Understanding a QLAC
It is important for you to understand how you will benefit from a QLAC and how the contract works. An income annuity is a contract under which there is an agreement between you and an insurance company. You pay a lump-sum investment amount in exchange for monthly paychecks beginning after a certain time in the future. The paycheck amounts are decided based on several factors such as age, upfront payment, deferred income period, etc. A QLAC enables you to enjoy certain perks such as tax benefits on savings in 401(k) and IRA accounts.
Benefits of a QLAC
Here are some of the major benefits that a QLAC offers:
Where IRA accounts get reduced over time, this policy takes a lump-sum amount from an IRA and then distributes a specified payment amount throughout the remainder of your life. You can use up to 25% of your IRA account – up to a $125,000 maximum for individuals or a $250,000 maximum for married couples – to purchase a QLAC. For example, investing $125,000 in a QLAC would distribute $5,000 monthly to an individual throughout his life beginning at the age of 85 if he deferred payments until that age.
Finite Planning Horizon
A QLAC policy provides security to the retiree, which gives him an opportunity to create a finite plan regarding his assets. He can now feel secure that after a certain age, he will receive a guaranteed paycheck and, thus, can manage his other assets to better provide for his financial security.
Required Minimum Distribution and Tax Deferral
There is an obligation for IRA holders to withdraw a minimum amount from their tax-deferred retirement account after they reach a certain age (as of 2017, the age is 70 1/2). However, there is an exemption to the required minimum distribution rules for a QLAC. Thus, you can allocate your savings from an IRA to a QLAC to defer tax obligations.
Though your money will ultimately be invested in the stock and debt markets, a QLAC ensures that your investment is safe from stock market swings. There are also options to select death benefits and other nominations to make sure your savings get transferred to your beloved in the event of your death (this is accomplished by naming your spouse as a joint annuitant).
Clear Product Structure
There are no hidden obligations with a QLAC and the structure is very simple. All you need to do is to tell them how much you are willing to allocate, and the insurance company will tell what return they are able to offer. As a QLAC is a fixed annuity – one with limited growth potential, you may want to pay a bit more for an inflation rider that will make sure your payouts increase indexed to the inflation rate.
A QLAC is a policy under which an insurance company guarantees monthly paycheques beginning at a certain age after retirement. A qualified individual pays an initial amount and premiums for a certain period of time to enjoy benefits after retirement until death.
CFI’s guide to QLACs is just one of many free resources we offer to help further your knowledge of finance and accounting issues. To learn more, check out the following CFI articles.