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Qualified Longevity Annuity Contracts for Unwanted RMD's
A Qualified Longevity Annuity Contract, or QLAC, is a specific type of income annuity that receives special tax treatment from the IRS. A QLAC provides a guaranteed monthly income until death.
Qualified Longevity Annuity Contracts are a deferred income annuity – meaning income payments don’t begin for at least one year or more from the date you purchase it.
A QLAC may only be purchased with pre-tax retirement savings such as an individual retirement account (IRA), 401(k) rollover, or another qualified retirement plan.
As long as the annuity complies with specific guidelines established by the Internal Revenue Service (IRS) the amount invested in the QLAC is not included in your RMD calculation and this is the only reason you would really want to purchase a Qualified Longevity Annuity Contract.
If you are having to take Required Minimum Distributions that you do not want or need; a QLAC can be a good financial instrument to postpone those unwanted RMD’s and the taxes they come with. Not to mention, lifetime income payments you can turn on in the future to help mitigate the effect of inflation and cost of living increases.
In this brief guide, we’ll explain exactly what a Qualified Longevity Annuity Contract is, its benefits, the annuity providers who offer them, and the specific guidelines set forth by the IRS.
Qualified Longevity Annuity Contract History
The Qualified Longevity Annuity Contract tax code was created in an effort to provide American families more flexibility to plan for retirement and protect themselves from outliving their assets.
At a July 1st, 2014 announcement, J. Mark Iwry, Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy Stated, “All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings.”
He continued to say that, “longevity annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.” (Federal Registrar, Vol 79, No. 127/ Wednesday, July 2, 2014/ Rules and Regulations, pp. 37633 et seq.)
On July 2nd, 2014 the U.S. Department of Treasury and the I.R.S. issued final rules regarding Longevity Annuities. These rules make Longevity Annuities accessible to those in the 401k and IRA markets in order to expand the availability of retirement income options.
QLACs Provide Income for the Rest of Your Life
There are only three ways an individual can guarantee they will get a monthly check for life. Social Security, a defined benefit Pension or by purchasing an annuity.
Buying an annuity in a retirement plan or an IRA has not been very common because the value of the annuity had to be calculated into the plan’s total valuation for the purposes of calculating the RMD ( required minimum distribution).
Once purchased the funds are generally not available for any purpose. The owner can only receive a stream of monthly payments, which may not be for some years in the future.
As a result, this created situations where a retiree may have to make RMD payments but have no liquid assets remaining in the plan or IRA to do so.
A Qualified Longevity Annuity Contract (QLAC) is the only retirement savings vehicle that allows you to defer your Required Minimum Distributions beyond the age of 72 (previously 70 1/2).
Qualified Longevity Annuity Contract Specifications
Prior to annuitization, the value of a QLAC is excluded from the account balance that is used to determine required minimum
distributions. Below are the guidelines that must be must be satisfied:
- The contract provides that distributions under the contract must commence no later than a specified annuity starting date that is no later than the first day of the month after the employee’s 85th birthday.
- The contract provides that, after distributions under the contract begin, those distributions must satisfy the requirements of Regulations section 1.401(a)(9)-6 (other than the requirement that annuity payments commence on or before the required beginning date).
- The contract does not make available any commutation benefit, cash surrender right, or other similar feature. • No benefits are provided under the contract after the death of the employee other than the benefits described in paragraph (c) of Q&A-17.
- When the contract is issued, the contract (or a rider or endorsement with respect to that contract) states that the contract is intended to be a QLAC.
- The contract is not a variable contract under section 817, an indexed contract, or similar contract, except to the extent provided by the Commissioner.
QLAC Premium Limits
Premium Limitation
QLAC premiums are limited to the lesser of $135,000 or 25% of your IRA holdings as of December 31st of the previous year.
- If you have $540,000 or more, this means $135,000.
- If you have less than $540,000, this translates to 25% of your IRA.
These limits apply to individuals, meaning that couples with separate IRA accounts could have up to $270,000 worth of QLACs. Note that it’s the insured’s responsibility to make sure his/her QLAC purchase complies with the premium limitations. If the limits are exceeded, excess premium must be returned by the end of the calendar year following the purchase.
The percentage limitation is an amount equal to the excess of 25% of the employee’s account balance under the plan (including the value of any QLAC held under the plan for the employee) as of that date over the sum of (1) the premiums paid before that date on the contract, and (2) the premiums paid on or before that date on any other contract intended to be a QLAC and that is held or was purchased for the employee under the plan.
Deferral Period
Deferral of income is allowed until age 85, at which point income payments must begin. To benefit from the RMD exemption, you’d also want to start income after age 72.
Sources of Funds
QLACs can be purchased with funds from all Individual Retirement Accounts except Roth IRAs; this includes:
- 403(b) and,
- 457(b) plans
QLACs can not be purchased with funds from Roth IRAs or Defined Benefit plans. If you are interested in using 401(k) funds, you may only do so once you have rolled these funds into a traditional IRA.
Qualified Longevity Annuity Contract Beneficiary Options
If the employee dies on or after the annuity starting date for the contract, the only benefit allowed to be paid (except as provided in paragraph (c)(4) of Q&A-17) after the employee’s death is a life annuity payable to the surviving spouse where the annuity payment is not in excess of 100% of the annuity payment that is payable to the employee.
If the employee dies before the annuity starting date, the only benefit allowed (except as provided in paragraph (c)(4) of Q&A-17) is a life annuity payable to the surviving spouse where the annuity payment is not in excess of 100% of the annuity payment that would have been payable to the employee as of the date that benefits to the surviving spouse start.
However, the annuity is permitted to exceed 100% of the annuity payment that would have been payable to the employee to the extent necessary to satisfy the requirement to provide a qualified pre-retirement survivor annuity (as defined under section 417(c)(2) or ERISA section 205(e)(2)) pursuant to section 401(a)(11)(A)(ii) of ERISA section 205(a)(2).
Any annuity payable to the surviving spouse of an employee who dies before the annuity starting date must start no later than the date on which the annuity payable to the employee would have started under the contract if the employee had not died.
QLAC Providers
- American General Life Insurance
- Integrity
- Lincoln Financial Group
- New York Life
- Principal Life
- Symetra
- United of Omaha
| Carrier | Product | Deposits | Issue Ages | Options |
|---|---|---|---|---|
| American General Life A.M. Best A S&P A+ | American Pathway DIA Maximum Deferral Period 30 Years | $20,000 min, $135k max QLAC Death Benefit prior to income start date: Life/Joint Life=ROP | 18-90 NQ Roth IRA 18-69 Q 18-83 QLAC Age Nearest | QLAC Options: - Life - Joint and Survivor 100%, or reduction in whole %'s - Life and Joint Life with a Cash Refund - Income Start Date Adjustment feature - Commutation Withdrawal Benefit - Cost of Living increase 1-5% simple or compound |
| Integrity A.M. Best A- S&P A- | Income Source Select | $10,000 min, $135k max QLAC | 18-83 NQ Roth IRA 18-70 Q 31-83 QLAC Flex Premium up to Income Start Date | - QLAC Options: Life Only and Life with a Cash Refund - Cost of Living increase 1-5% compound - Flex income start date feature |
| Lincoln National Life A.M. Best A+ S&P AA- | Deferred Income Solutions Maximum Deferral Period 13 mths-40 years or age 85 NQ - 72 Q | $1,000 min, $135k max QLAC Death Benefit prior to income start date: Life Only: None All other opts: ROP | 18-80 NQ Roth IRA 18-69 Q 18-80 QLAC Age Nearest | QLAC Options: - Life with a Cash Refund - Accelerated Payment Feature (restrictions apply) - Cost of Living increase 1-4% compound - Flex income start date feature (not avail on Life Only) - Flexible premium version avail in most states |
| New York Life A.M. Best A++ S&P AA+ | Guaranteed Future Income Annuity II Maximum Deferral Period 2-40 years or age 85 NQ-72 Q | $5,000 min, $135k max QLAC Death Benefit prior to income start date: Life Only: None | 0-80 NQ 20-80 Roth IRA 18-68 1/2 Q 31-80 QLAC Flex Prem up to 2 yrs before income start date (min $100) Actual Age | QLAC Options: Life Joint and Survivor 100%, or reduction from 40%-99% Life and Joint Life with a Cash Refund - Cost of Living increase 1%-3% compound - Flex income start date feature |
| Principal Life A.M. Best A+ S&P A+ | Deferred Income Annuity Maximum Deferral Period NQ= 30 Years or age 95 Q= 30 Years or age 72 | $10,000 min, 135k max QLAC Death Benefit prior to income start date is ROP | Life Only 0-82 QLAC Actual Age | QLAC Options: - Life - Joint and Survivor 100%, or reduction from 1%-99% - Life and Joint Life with a Cash Refund - Flex income start date feature |
| Symetra A.M. Best A S&P A | Freedom Income Annuity Maximum Deferral Period 45 years or Age 90 | $10,000 min | 0-95 Age Nearest | - Life - Life with a Period Certain - Period Certain Only 5 year minimum - Life and Joint Life with an Installment Refund - Life and Joint Life with a Cash Refund - Joint and Survivor - Joint and Survivor with a Period Certain - Cost of Living increase .10%-6.5% compound - Commutation to Beneficiary Option (not avail with Cash Refund or Life Only options) |
| United of Omaha A.M. Best A+ S&P A+ | Deferred Income Protector Maximum Deferral Period 2-40 years or age 85 NQ & QLAC 72 Q | $5,000 min $135k max QLAC Death Benefit Life Only: None All other opts: ROP | 40-75 QLAC Age Nearest Flex Prem min $2k | - Life and Joint Life - Life and Joint Life with a Cash Refund - Life and Joint Life with an Installment Refund (not avail for QLAC) Flex Income Start Date |
Frequently Asked Questions
To use plain English, a Qualified longevity annuity contract is a pension you can buy for yourself using your tax-deferred retirement savings. Because of its special designation, QLAC income payments can start later than 72. This reduces your RMDs and associated taxes during that period of time.
Single Premium Immediate Annuity (SPIA) – income begins within 12 months of purchase.
Deferred Immediate Annuity (DIA) – income begins more than 12 months after date of purchase.
Qualified Longevity Annuity Contract (QLAC) – special type of income annuity that takes advantages of IRS code allowing you to defer taking RMDs on tax deferred savings up to age 85. Required minimum distributions begin at age 72 for all other qualified retirement savings accounts.
Visit our comprehensive Beginners Guide to Income Annuities page if you’d like a more in-depth understanding of Income Annuities.
Licensed Agents can sell QLACs as long as they are contracted with an insurance company who issues them.
Below are a list of Insurers that issue QLACs and are rated A or better with AM Best.
- AIG (A) – American Pathway Deferred Income Annuity
- Guardian (A++) – The Guardian SecureFuture Income Annuity
- Lincoln Financial (A+) – Deferred Income Solutions
- MassMutual (A++) – MassMutual RetireEase Choice
- Mutual of Omaha (A+) – Deferred Income Protector
- New York Life (A++) – Guaranteed Future Income Annuity II
- Pacific Life (A+) – Pacific Secure Income
- Principal (A+) – Principal Deferred Income Annuity
In This QLAC Guide
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