What Is a Qualified Longevity Annuity Contract (QLAC)?

A qualified longevity annuity contract, or QLAC, is a type of annuity contract that you can use to create an additional stream of income in retirement. This type of annuity can offer guaranteed monthly payments beginning at a specific date and ending when you pass away. Like other annuities, it’s important to weigh the pros and cons before deciding whether it makes sense to include one in your financial plans.

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What Is a Qualified Longevity Annuity Contract?

A QLAC is a type of deferred annuity contract. With an immediate annuity, payments from the annuity to you can begin right away or relatively soon after you purchase it. A deferred annuity, on the other hand, doesn’t begin making payments to you until a later date.

While other types of annuities can be funded using savings or by paying regular premiums from your income, QLACs are different. This kind of annuity is funded using pre-tax dollars from an individual retirement account (IRA) or 401(k) account, hence the “qualified” part of its name. It’s important to note that you can’t use after-tax dollars from a Roth IRA or money from an inherited IRA to purchase a QLAC.

How Does a QLAC Work?

When you buy an annuity, you’re purchasing a contract from an insurance or annuity company. That contract specifies that you’ll pay in premiums and then at some point, the insurance company begins making payments back to you. These payments can be made in monthly installments or a lump sum, depending on how the annuity is structured.

You take money from your 401(k) or IRA to purchase the annuity, agreeing on a specific date when payments to you should begin with the annuity contract issuer. In the meantime, the money is able to grow tax-deferred until you’re ready to begin receiving payments.

Up until age 85, a QLAC allows you to temporarily sidestep required minimum distributions (RMDs) associated with traditional IRAs, 401(k)s and other qualified, tax-deferred retirement plans. This is why they may be appealing to some investors for managing their retirement strategy.

Advantages of Using a QLAC for Retirement Planning

When you invest money for retirement in a traditional IRA or 401(k), there are some important tax rules to observe. One of the most important has to do with RMDs. For these accounts, if you’re turning 73 in 2024, you have until April 1, 2025 to take your first RMD. For every RMD after your first though, the due date is December 31 each year. Looking to the future, the RMD age will rise to 75, starting with those who turn 74 after Dec. 31, 2032.

Failing to take your RMD on time could result in a steep tax penalty. The IRS can impose a penalty equal to 25% of the amount you were required to withdraw. The penalty could be lowered further to 10% if you correct the mistake with the IRS within two years.

A QLAC allows you to defer taking those distributions temporarily without incurring a tax penalty. Specifically, you can defer taking payments from this type of annuity up until age 85. If you’ve funneled some of the money from your traditional IRA or 401(k) into a qualified longevity annuity contract, you can delay taking RMDs and subsequently having to pay the income taxes owed on them.

This can be a good thing if you expect to have a longer life expectancy and you want to avoid the possibility of running out of money in retirement. A QLAC would deliver guaranteed income to you and pay that income for the remainder of your life. So even if you deplete other retirement savings or assets, you’d still have a steady stream of income from your annuity contract.

QLACs can also offer principal protection and insulation against market volatility. That can be reassuring if you’re concerned about how a recession or increased rates of inflation might affect your purchasing power. And if you’re married, you could set up your QLAC as a joint annuity so that your spouse is able to continue receiving payments if you pass away or vice versa.

What to Know Before Purchasing a QLAC

If you’re interested in using a longevity annuity to fund your retirement goals, there are a few things to keep in mind.

First, you should know that that QLACs aren’t a free-for-all when it comes to delaying RMDs. The IRS does impose limits on how much you can use to purchase them. Stemming from changes from SECURE Act 2.0, the limit for 2024 is $200,000 with no percentage-of-savings limit. This limit has the potential to increase annually with inflation, and there is also a 90-day free-look provision.

Next, consider the level of risk and growth you’re likely to see from your money. While your principal is protected with this type of annuity the amount of growth you can realize is fixed. Investing your money elsewhere may involve taking on more risk but it could yield better returns than a qualified longevity annuity contract may provide.

You should also be aware of what type of investments you can make with this kind of annuity. For instance, you can’t invest QLAC money in a variable annuity or indexed annuity. Instead, you have to choose a fixed annuity that offers a predictable rate of return.

And again, remember that this type of annuity only delays the need to take RMDs and it doesn’t eliminate it entirely. Even if you push back payments until age 85, you’ll still have to receive them and pay taxes on them eventually. And with the tax landscape ever-changing, there’s no guarantee of how much you might be able to save in taxes by purchasing a longevity annuity if your tax bracket changes.

Bottom Line

Longevity annuity contracts, one of several types of annuities, can help you secure reliable income for retirement but they may not be right for everyone. And if you don’t own a traditional IRA or 401(k), you may not be able to purchase one at all. If you do have eligible retirement accounts, considering things like your life expectancy, your investment objectives and your financial needs can help you decide if a QLAC is a good fit.

Tips for Investing

Consider talking with a financial advisor in more detail about QLACs and other retirement planning strategies. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When comparing any type of annuity product, it’s important to consider the costs as well as the quality and reputation of the company that’s offering it. Investigate an annuity company’s ratings and look for one that’s in good financial shape. If your annuity company were to go bankrupt, it might not have the money to make your annuity payments when the time comes.