Many people could achieve a few retirement savings goals by adding a qualifying longevity annuity contract (QLAC) to their IRAs.
What is a Qualified Longevity Annuity Contract?
QLACs were created in regulations of the IRS in 2014. They’re an IRS-approved way to secure a lifetime stream of income from your IRA and ensure you never run out of income in retirement. You can also reduce the required minimum distributions (RMDs) from your IRA for several years. Some people use them to fund long-term care that might be needed later in retirement.
With a QLAC, you deposit a lump sum with an insurer and receive a promise that the insurer will pay a guaranteed lifetime stream going forward. You determine, within certain limits, when the income payments begin. Income payments from QLACs can start as early as 72 or as late as 85. Income payments are delayed for as little as two years or up to 45 years (but no later than age 85) after you purchase the pension.
The later the income payments begin, the higher they will be.
The longevity pension ensures that you do not run out of income during your lifetime. You always have income from Social Security (the inflation-adjusted longevity pension that almost everyone has) and longevity pension.
A QLAC also reduces RMDs in years before income payments begin. The rules, enacted in 2014, state that IRA balances invested in QLACs will not be used to calculate your RMDs until income from the QLAC begins or you reach 85 years of age, whichever comes first. The amount invested in QLACs that cannot be used to calculate RMDs is capped at $125,000 or 25% of your IRA balance, whichever is lower. The $125,000 limit is inflation-indexed and set at $145,000 for 2022. The $145,000 limit is calculated by aggregating all your IRAs. In other words, it’s a per taxpayer limit, not a per IRA limit.
Whether you have exceeded the 25% limit is determined by comparing the amount invested in QLACs to all of your IRA balances at the end of the previous calendar year. Married couples apply maximum per person limits. Each spouse can invest up to $145,000 or 25% of their IRA in QLACs.
How to buy a QLAC
QLACs can also be purchased through participating 401(k) and similar plans and reduce RMDs in the same way. The 25% limit applies to each plan and the $145,000 limit applies per person.