In 2024, the United States reached a demographic milestone known as “Peak 65,” with more Americans turning 65 and living longer. This shift has intensified concerns about the adequacy of retirement savings. Because of this, QLAC is gaining more attention as retirees look for income solutions that can extend beyond retirement.
If you’re assessing how a QLAC fits into your long-term retirement strategy, this article will outline how it works, its benefits, limitations, and how to decide if it’s right for you.
What Is a QLAC?
A qualified longevity annuity contract (QLAC) is a deferred income annuity funded with assets from a qualified retirement account, such as a traditional IRA or 401(k).
This contract allows you to shift a portion of your retirement savings into an agreement that starts paying income later, often between 75 and 85.
How Does a QLAC Work?
Once the contract is in place, the insurer sets a fixed monthly income based on the premium, your age at the time of purchase, and the age when payments will begin.
You select the start date, which can be any time up to age 85.
Then, you’ll fund the QLAC by transferring money from your traditional IRA or 401(k).
Your allocated amount is excluded from your required minimum distribution (RMD) calculations until the payout begins.
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What Are the Features of a QLAC?
QLACs have specific structural features, such as:
Deferred Income Annuity
A QLAC is a type of deferred income annuity. You pay a premium upfront, but income payments don’t begin until a future date you choose, no later than age 85
Qualified Retirement Accounts
You must purchase a QLAC using funds from a qualified retirement account, such as a traditional IRA or 401(k). However, Roth IRAs are excluded.
The annuity must meet specific IRS rules to maintain its QLAC status, including contribution limits and contract structure.
Tax-Free Transfers
When you use funds from a qualified account to buy a QLAC, the transfer itself is not taxed. This allows you to move money without triggering a distribution event.
However, once payments begin, income from the annuity is taxed as ordinary income, just like other withdrawals from retirement accounts.
Deferred Income Payments
QLACs have deferred income payments, which means you select the age at which payments start, anytime up to age 85.
Guaranteed Income
Once the income phase starts, the payments are fixed and last for life. Depending on the insurer, you can also choose options such as joint payouts for spouses or return-of-premium features.
Who Should Buy a QLAC?
Anyone between the ages of 18 and 75 can purchase QLACs. However, it tends to suit individuals in their late 50s to early 70s who are focused on planning for long-term income needs.
Other candidates that suit QLACs include:
- Individuals with good health and a family history of longevity
- Individuals with retirement funds
- Individuals who are comfortable with the potential setbacks of QLACs
What Are the Advantages of QLAC?
QLACs offer the following benefits:
Delayed Required Minimum Distributions (RMDs)
A QLAC allows you to delay RMDs on the portion of retirement accounts used to fund the annuity. The IRS excludes this amount from annual RMD calculations until income begins, which can be as late as age 85.
This delay reduces taxable withdrawals in your early retirement years, giving you more control over your income stream and tax exposure.
For instance, if you’re 72 and managing fluctuating income from other investments, using a QLAC can help you avoid tapping into your IRA prematurely.
Guaranteed Lifetime Income
QLACs provide fixed monthly payments that begin at a future date you choose. Once payments start, they continue for the rest of your life.
This structure offers long-term security and can offset the risk of depleting assets.
Suppose you’re 65, retired, and budgeting on a low income while expecting to live into your 90s.
Setting up a QLAC to start at 85 ensures you’ll still have a reliable source of income without relying on investment returns.
Potential for Higher Payouts
Because QLAC payouts are delayed, the insurer can offer larger monthly income compared to an annuity that begins immediately. This higher income is driven by the deferral period and expected longevity.
Let’s say you’re 60 and defer payments for 20 years. You’ll likely receive a higher monthly income later compared to taking payouts now, which can help cover expenses when you’re no longer drawing from other retirement accounts.
Lower Taxes
By removing the QLAC-funded amount from RMD calculations, you can reduce the taxable income reported during your 70s.
This helps lower your tax bracket and may also reduce taxes on Social Security or Medicare premiums.
If you’re recently divorced or separated and living on one income, a QLAC can help keep distributions lower.
At the same time, if you’re trying to simplify your budgeting, a QLAC can give you one less variable to manage as part of your long-term tax and expense tracking strategy.
QLAC Helps Reduce Market Risk
QLACs aren’t tied to market performance, which makes them useful for those who want protection from investment volatility. They preserve a portion of retirement funds from downturns, ensuring stability regardless of economic cycles.
For example, if you’re in your early 80s and concerned about your stock-heavy portfolio during a downturn, your QLAC income remains intact, giving you a safety net without selling assets in case of losses.
Spousal Benefits
Specific QLAC contracts allow you to add a joint-life option, which continues payments to a spouse after your death. This option helps ensure ongoing income for the surviving partner and prevents income loss due to one spouse’s passing.
If you’re part of a DINK couple or empty nesters planning for long-term care needs, setting up a joint-life QLAC can protect your spouse financially even if you pass first, offering shared security through fixed income.
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What Are the Disadvantages of QLAC?
A QLAC comes with the following limitations, which may not suit your retirement plan:
Lack of Flexibility
Once you fund a QLAC, you give up access to that portion of your retirement account until the annuity begins paying. You can’t withdraw, adjust, or liquidate the contract.
This limited access can be a significant problem if you encounter unplanned expenses.
For example, if you’re 68 and dealing with an urgent home repair while juggling other types of expenses, your QLAC funds are off-limits, even if the money is unused for years.
Limited Inflation Protection
Most QLACs offer fixed payments that don’t adjust with inflation. As a result, the real value of the income can decline over time, especially during periods of high inflation.
This can erode your purchasing power in the years when medical or care-related costs often rise.
For instance, if you’re 85 and still renting or buying household services or personal care, a $1,200 fixed monthly income might not be enough at 95 when those same services cost significantly more.
Investment Limits
The IRS limits how much you can contribute to a QLAC. This cap restricts the size of future payouts, regardless of how much you’ve saved in total.
Say you want to secure $4,000 a month starting at 85, but already use your retirement accounts for other commitments. A QLAC won’t bridge the gap without combining it with other long-term investments.
Also, since QLACs are fixed annuities, they don’t grow with the market.
While they offer security, they miss out on the potential higher returns of short-term investments or equities. This limits wealth-building, especially for those with longer time horizons.
If you’re 55 and prone to impulse buys or lifestyle inflation, tying up funds in a low-growth QLAC early might prevent you from allocating more efficiently to flexible or higher-yield options.
Complex Contract Terms
QLACs involve specific IRS rules, payout restrictions, and insurance contract language that can be hard to interpret without financial guidance.
As a result, minor misunderstandings can lead to unfavorable terms or missed tax benefits.
If you’re managing a debt management plan and are unsure how annuity payouts affect your budget, navigating the contract alone could create issues that impact how you save or invest in the future.
You Can’t Cash Out Early or Change the Start Date
Once purchased, you can’t cash out early or change your payout start date. This permanency becomes a drawback if your lifestyle shifts unexpectedly.
For example, if you lose a second household income due to a job loss, you can’t adjust your QLAC to respond, and that money remains inaccessible until the payout date.
You May Not Receive Benefits In the Event of an Early Death
QLACs don’t automatically return unused funds to your estate if you die before payments begin.
Unless you choose a return-of-premium or spousal continuation feature at the time of purchase, the insurer keeps the full amount.
This lack of payout can create financial gaps for families who expect the funds to remain part of the estate.
Suppose you buy a QLAC at 70, skip the death benefit to increase future income, and pass away at 79.
Your heirs may receive nothing, even if they’re still managing housing costs, such as leasing or renting, and were depending on that support.
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How to Decide if a QLAC Is Right for You
Deciding whether to include a QLAC in your retirement plan depends on your income needs, health outlook, and risk tolerance.
Here are the steps to ensure an informed decision:
Evaluate Your Retirement Needs
The first step involves evaluating your retirement needs. Start by estimating your future income gaps, particularly from age 80 onward.
Consider how much of that income should be fixed and predictable. This will help you determine if a QLAC fits into your long-term income strategy.
You can create a spreadsheet with all projected housing, medical, and living costs after 80, then line it against your pension, Social Security, and remaining investment income.
If there’s an insufficient area, a QLAC may help close that gap.
Compare Multiple Insurance Companies
Not all QLAC contracts offer the same terms. Payout amounts, fees, and options like spousal continuation or return-of-premium vary by insurer.
Therefore, comparing quotes ensures you get the best value for the premium.
You can request quotes from three insurers and use an online calculator to compare guaranteed payouts for the same investment amount.
These quotes will help you decide which contract offers the most income for your money.
Consult Professionals
A financial advisor can review the QLAC terms with you, explain how they affect your retirement income, and point out any tax implications.
Since this decision affects your long-term savings, it helps to get a second opinion.
You can search for a fee-only fiduciary through the National Association of Personal Financial Advisors (NAPFA) or use directories like the CFP Board to find certified planners.
Then, bring your retirement account statements and ask how a QLAC would affect your required distributions and long-term withdrawal strategy.
Consider Alternatives to QLAC
Before committing, consider your alternatives. For example, hybrid annuities may offer income with more flexibility.
On the other hand, tax-deferred accounts like traditional IRAs or tax-free investment accounts such as Roth IRAs can offer different advantages depending on your tax bracket.
To weigh your options, you can compare a QLAC payout to leaving the same amount in a tax-deferred 401(k) or a hybrid annuity with partial liquidity.
This way, you can decide which better supports your retirement income while limiting unnecessary expenses.
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The Bottom Line
QLACs are contracts that commit part of your retirement savings to a delayed income stream, with clearly defined terms and no early withdrawals.
It may be practical if you’re looking to defer taxable income, reduce RMD pressure, or create a fixed payout that begins at a predetermined age.
However, since the funds are unavailable once committed, your decision must reflect your cash flow planning and willingness to give up flexibility.
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