How to Know If You Should Buy a QLAC Annuity

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Qualified Longevity Annuity Contracts (QLACs) were approved on July 1, 2014, by the U.S. Departments of Labor and Treasury for use in approved retirement plans and Traditional IRAs. This is a game-changing product for consumers because of its low commission, but agents don't actively learn about and sell it for that same reason.

How a QLAC Works

QLACs allow you to defer distribution of a certain sum past age 70 ½ inside a Traditional IRA. This guarantees an income stream that can be started as far out as age 85. You don’t have to defer it for that long, but you can. More important, the money in a QLAC is not considered as part of your required minimum distribution (RMD) calculation when you turn 70 ½. 

That is a big deal becuase it means your taxes will be lower on your RMDs. A QLAC is the only annuity type that can do this. The maximum you can invest in a QLAC as of mid-2019 is $130,000. For example, if you have a total non-Roth IRA asset of $520,000 on Dec. 31, 2018, you can buy a $130,000 QLAC in 2019, according to rules in place in mid-2019. This represents 25% of the previous year-end balance.

When you calculate RMDs, the total will be based on $390,000 instead of $520,000. Because of this lower amount, your RMD taxes will most likely be lower.

QLACs can be structured for a joint payout with your spouse, along with COLA (Cost of Living Adjustment) increases. (There is an associated cost for this.) You can also set up the contract so that 100% of any unused principal money goes to your listed beneficiaries, not the annuity company.

The Negatives of QLACs

The primary problem with QLACs is the limited amount of money you can place in one. Currently, the ruling states that the maximum total dollar amount you can place in a QLAC is the lesser of $130,000 or 25% of your non-Roth IRA. An increase of $5,000 per year has been in effect since Jan. 1, 2018. There is no set increase schedule.

Another issue with QLACs is that the strategy has no accumulation value, but some investors like the secure feeling of knowing they can expect a set amount of payments for life. More short-sighted investors mistakenly compare QLACs to investments. Annuities (including QLACs) are not investments. In other words, if you put $130,000 into a QLAC with the plan to start taking the income in eight years, but you die in year seven, your beneficiaries get $130,000—even if the stock market tripled in the same time period. Of course, if stocks declined in value, beneficiaries get the same $130,000.

QLACs as the Driving Force for All Types of Annuities 

Annuities are structured to provide principal protection and income payments, and can help plan for longevity, legacy, and long-term care needs. The QLAC product is very pro-consumer for these purposes.

The explosion of the mutual funds industry was preceded by a rule allowing mutual funds as an option inside a 401(k). In that same way, QLACs (i.e. Longevity Annuity structures) are expected to become the top-selling annuity eventually.

They are also likely to evolve into a direct-to-consumer product sold online. Eliminating the high-pressure sales pitch from an agent while providing some retirement income security is a double win for consumers.