Before retiring, many people worry about how long they will live and whether their money will last them. In addition to traditional retirement savings such as employer-sponsored plans, there is now another type of retirement account that ensures you won’t run out of money during retirement. Qualified Longevity Annuity Contracts (QLACs) allow you to contribute 25% or $130,000 (whichever is less) from your IRA or 401(k) into this type of annuity. QLACs differ from more traditional annuities.
Currently, only 3% of large U.S. companies include QLACs in their 401(k) plans. These companies view QLACs as a favorable choice for retirees to tap into funds after their pre-tax assets have been used up. This is due to the guaranteed income stream they offer, as well as the requirement for ‘late in life’ minimum distributions (RMD).
Requirements For QLACs
In order to qualify for tax benefits, a Qualified Longevity Annuity Contract must adhere to specific requirements established by the Internal Revenue Service (IRS). Some of these requirements include:
- The QLAC must meet specific premium payment and contribution limits.
- The annuity starting date cannot be later than the first day of the month following the annuitant’s 85th birthday.
- QLACs must adhere to certain contract and benefit restrictions to ensure they provide longevity protection.
- The contract must be irrevocable and meet specific disclosure requirements.
It’s crucial to seek advice from a financial advisor or tax professional for detailed information regarding QLAC requirements and the tax implications based on individual circumstances.
How do QLACs differ from traditional annuities?
QLACs differ from traditional annuities in several ways. While traditional annuities usually start paying out immediately or shortly after the initial investment, QLACs allow for deferred payments until a later age (typically between 70 ½ and 85). This feature of QLACs provides a way to secure a guaranteed income stream for the later years of retirement.
Additionally, QLACs have specific premium payment and contribution limits set by the IRS. And the annuity starting date is restricted to no later than the first day of the month following the annuitant’s 85th birthday. These restrictions are in place to ensure that QLACs provide longevity protection.
Furthermore, QLACs can be funded from a qualified retirement plan, a Traditional IRA/Roth IRA, or with after-tax dollars, providing flexibility in funding sources compared to traditional annuities.
It’s important to note that QLACs are designed to address the concern of outliving retirement savings by providing a guaranteed income stream for life – making them a distinct option from traditional annuities.
Important Information About QLACs
QLACs are commonly known as a ‘personal pension plan’ by retirement planners. These annuities guarantee payments for the annuitant’s lifetime once distributions begin. Here are some key points about QLACs:
- Payments can start anytime between ages 70.5 and 85 – with 85 being the required minimum distribution (RMD) age.
- QLACs can be funded from a qualified retirement plan, Traditional IRA/Roth IRA, or with after-tax dollars.
- QLACs must meet specific requirements set by the Internal Revenue Service to qualify.
- Not every insurance company issues QLACs, and not every annuity can be used as a QLAC.
- QLACs can be funded over an individual’s working years to be used in retirement.
- It is important to consider the financial stability of the insurer when purchasing QLACs. Buying from multiple companies may be a good strategy for retirement planning.
- Distributions from QLACs are taxed at an individual’s regular tax rate.
- Most QLACs offer an inflation rider, adjusting payments as the cost-of-living increases in line with Social Security adjustments made by the IRS.
QLACs provide guaranteed income in retirement that you can’t outlive. Contact the Trajan Wealth team for more information on companies offering QLACs.
