QLAC: A Different Type of Longevity Annuity

QLAC: A Different Type of Longevity Annuity
••• By Rune Johansen / Photo Disc / Getty Images

Not all Longevity Annuities are QLACs

Longevity Annuities have been around and sold in both IRA and non-IRA accounts since 2004. A ton of my clients already own them for future guaranteed income needs.

Just because an annuity is called a Longevity Annuity does not mean that it is recognized as a QLAC.  This is very important to know, and will be a center of confusion as the QLAC strategy grows in popularity. If you already own a Longevity Annuity, it can NOT be re-classified as a QLAC. A QLAC is a unique type of longevity annuity that can be used in qualified plans like a 401k or Traditional IRA. Prior to QLACs being made available, if you owned  a Longevity Annuity contract within an IRA, most carriers required you to turn on the income stream before 70 ½ , and would not even run proposals past that age.

What is a Longevity Annuity?

A Longevity Annuity is a fixed annuity that guarantees a future income stream at a date you specify to begin those payments. It is also commonly referred to as a Deferred Income Annuity (DIA).  Some Longevity Annuity (DIA) contracts allow you to defer as short as 2 years, and as long as 45 years.  Originally introduced in 2004, Longevity Annuities have started to become popular in the last few years as a simplistic alternative to income riders attached to deferred annuities like variable and indexed annuities.

QLACs have a premium limitation of 25% of your total IRA assets or $125,000, whichever is less. For example, a total IRA amount of $500,000 would be allowed to buy a $125,000 QLAC and defer that amount for future income. People can also use Longevity Annuities (DIAs) outside of their IRA if guaranteed future income above those levels is needed. With non-qualified (non-IRA) DIAs, there is no premium limitation. In combination with QLACs, DIAs can shore up any contractual income needs that you may have and can complement Social Security and pension payments.

What is a QLAC?

The actual statute identifies a QLAC as a Qualifying Longevity Annuity Contract. Generally they are referred to as Qualified. The key letter of the QLAC acronym is “Q” which stands for Qualified. This distinction applies to specific retirement accounts and allows you to use a QLAC to defer past age 70 ½ and all the way up to age 85 within your qualified plan.

How does a QLAC change required minimum distributions from a Traditional IRA?

Deferring past 70 ½ is very important because of the IRS Required Minimum Distribution (RMD) rules that make you start taking money out of your IRA at age 70 ½. QLACs can potentially lower the taxes on your RMDs because you will be basing those calculations on the remaining amount.  In the example above, instead of taking RMDs on $500,000, you would be making your RMD calculations on $375,000.  That’s a big difference, and could mean significant tax savings over time.

Is it hard to acquire a QLAC?

QLACs will have specific application paperwork and the policy will spell out that the product is approved under the QLAC ruling. This is very important for the consumer to fully understand before buying, and to verify on policy delivery.

Only a longevity annuity is used in a QLAC. No variable or indexed annuities allowed!

Under the QLAC ruling, only the longevity annuity (DIA) structure has been approved. Variable annuities and fixed index annuities ARE NOT recognized as QLACs, to the dismay of commission driven agents.  That’s good news for the consumer, because unlike the mentioned variable and fixed annuities, the longevity annuity structure has no moving parts, no annual fees, is very easy to understand, and can be fully explained to and understood by a child.

So when you go shopping for a QLAC to put in your Traditional IRA, ask for the QLAC by name.  Demand the QLAC.  Understand the QLAC.  Receive a lifetime income stream from your own QLAC!