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Qualified Longevity Annuity Contract (QLAC)

A Qualified Longevity Annuity Contract (QLAC) is a type of financial product in the IRA (Individual Retirement Account) industry designed to provide a reliable income stream later in retirement. Here are some key points about QLACs:

  1. Deferred Income Annuity: A QLAC is essentially a deferred income annuity. This means it is an annuity contract that delays payments until a future date, usually when the retiree reaches an advanced age (such as 80 or 85). This delay allows for the accumulation of a larger annuity balance.
  2. Longevity Risk Management: The primary purpose of a QLAC is to manage longevity risk, which is the risk of outliving one’s savings. Ensuring a steady income later in life provides financial security regardless of how long the individual lives.
  3. Tax Benefits within IRAs: QLACs are specifically designed for use within IRAs and other qualified retirement plans. One of their key benefits is that they allow the account holder to defer Required Minimum Distributions (RMDs) on the funds invested in the QLAC. Normally, RMDs must begin at age 72, but money invested in a QLAC is not subject to RMDs until payments begin, which can be as late as age 85.
  4. Investment Limits: There are limits on how much of your IRA or retirement plan can be invested in a QLAC. As of my last update, the limit was the lesser of 25% of the account’s value or $135,000 (but these figures may have been adjusted for inflation or regulatory changes since then).
  5. Guaranteed Payments: Once payments begin, they are typically guaranteed for the life of the retiree, providing a predictable income stream. Some contracts may also provide options for survivor benefits, ensuring that a spouse or beneficiary receives payments after the retiree’s death.
  6. Liquidity Considerations: It’s important to note that investing in a QLAC reduces liquidity, as the funds are locked into the annuity contract until the payment period begins.

QLACs are a tool for retirement planning, particularly for those concerned about outliving their savings. However, like any financial product, they should be considered within the broader context of an individual’s retirement strategy and goals.