How to Understand & Structure Qualified Longevity Annuity Contracts (QLACs)
Qualified Longevity Annuity Contracts (QLACs) continue to grow in popularity with Traditional IRA owners because you can lower the taxes on your Required Minimum Distributions (RMDs) and receive a lifetime income stream starting at a future specified date.
It’s important to know the two best ways to contractually structure your QLAC policy within your IRA, and the benefits and limitations of each choice.
QLAC rules
On July 1, 2014, the Department of the Treasury and the IRS approved the use of Qualified Longevity Annuity Contracts, aka QLACs, within 401(k)s and IRAs. QLACs are also known as Longevity Annuities or Deferred Income Annuities (DIAs) and were introduced around 10 years ago as a simplistic, no-fee way to solve for lifetime income starting at a future date.
QLACs were approved by the Treasury Department and the IRS in July of 2014with specific rules on how they can be used within approved qualified accounts. The current maximum dollar amount allowed is the lesser of 25% of your total IRA assets, or $125,000. In addition, you can defer the income starting as far out as age 85. In other words, you can start the payments any time after age 71, but not later than age 85. It’s your choice at the time of application on how you want to set up the QLAC policy.
Life Only
Structuring your QLAC “Life Only” guarantees that you will receive the highest possible contractual payout and never outlive your money. With this choice, once the income stream starts, any remaining balance in your QLAC account goes “poof” when you die. Obviously, this is a downside, but not your only structuring choice. You would choose “Life Only” if you wanted the highest payout, and had no desire to leave a legacy.
Even though you are the sole owner of your Traditional IRA, you can structure your QLAC policy “Joint Life Only” with your spouse. The same rules apply, but the income guarantee is for both lives. In other words, if one of you dies, the QLAC income payments continue unchanged and uninterrupted for the life of the surviving spouse.
I also advise QLAC purchasers to structure your “Life Only” payout with Return of Premium (ROP). That guarantees a lifetime income stream, with 100% return of the premium to your beneficiaries if you die before the income starts.
Life with Balance Refund
The most popular choice for structuring a QLAC is “Life with Cash Refund,” or what I refer to as “Life with Balance Refund.” This choice guarantees an income stream that you can never outlive, with any balance left in the account going to your listed beneficiaries of the policy in a lump sum. In other words, the annuity company does not keep a penny regardless of what happens.
You can also structure this policy “Joint Life with Cash Refund” to guarantee an income stream for both spouses. The payout for “Life with Cash Refund” is contractually lower than “Life Only,” but most people want to make sure that all of their hard-earned IRA money goes to them or their family, and not the annuity company.
Remember that QLAC lifetime income guarantees are primarily based on your life expectancy at the time you start the payments. It’s transfer of risk to the annuity company to pay regardless of how long you live. Annuities are pensions. Annuities are contracts. Annuities should be owned for their contractual guarantees. Those certainties apply to QLACs as well, along with potential benefit of lowering taxes on your RMDs.
QLACs are not too good to be true, but they are pretty darn good from a contractual standpoint. If you have a Traditional IRA, it’s at least worth looking at a QLAC quote on your specific situation.
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