QLAC Annuities: Securing Your Retirement with Guaranteed Income
Qualified longevity annuity contracts, or QLAC annuities, are financial products that guarantee a stream of income in retirement. QLAC annuities differ from other annuities because they’re funded with money that comes from a retirement plan, like a 401(k) or IRA. It can then be annuitized later in retirement to create a supplemental stream of income.
- Written by Christian Simmons
Christian Simmons is a writer for RetireGuide and a member of the Association for Financial Counseling & Planning Education (AFCPE®). He covers Medicare and important retirement topics. Christian is a former winner of a Florida Society of News Editors journalism contest and has written professionally since 2016.Read More
- Edited ByLamia Chowdhury
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- Financially Reviewed ByToby Walters, CFA®
Toby Walters, CFA®
Chartered Financial Analyst and Paraplanner
Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.Read More
- Published: April 20, 2023
- Updated: May 17, 2023
- 7 min read time
- This page features 3 Cited Research ArticlesKey Takeaways
- A qualified longevity annuity contract, or QLAC, is a unique annuity product paid into using existing money from a qualified retirement account.
- QLACs are a way to prevent the risk of living to such an old age that you run out of money.
- A QLAC can be a strong option for those who are risk-averse.
What Are QLAC Annuities?
Investors buy most annuities by paying for them over time or with a lump sum of cash. But QLAC annuities are purchased specifically with a chunk of existing retirement savings, such as money from your 401(k) plan.Plans That Can Fund QLACs
- 401(k) Plans
- Individual Retirement Accounts
- 403(b) Plans
- Other Types of Qualified Retirement Plans
QLAC annuities pay out late in retirement and provide a financial hedge against outliving your savings if you have a long retirement. Another advantage of a QLAC annuity is that it can allow you to delay required minimum distributions, or RMDs, up until you turn 85.
You can use a portion of your qualified retirement savings to purchase a QLAC that will annuitize later in your retirement. Then you don’t have to worry about RMDs on that money until the contract annuitizes, at which point it can provide you with a fresh stream of income.
Like other types of annuities, that stream of payments is guaranteed and will last for the rest of your life, even if it eventually exceeds the principal.
Benefits of QLAC Annuities
The ability to delay RMDs with the money invested into the product is one of the primary benefits of opting for a QLAC annuity. But it’s also a potential option for people who don’t want to take on much retirement savings risk.
A QLAC annuity is a conservative option that has few risks attached. When you invest money into a QLAC, you protect it from the volatility of the stock market that affects other annuity products.
Another benefit of a QLAC annuity is the creation of guaranteed payments. Once the payout from the annuity starts, the payments last throughout the rest of your life.STEP 1STEP 2STEP 3
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Risks and Considerations for QLAC Annuities
As with many financial products, QLAC annuities have risks to consider. For one, the money you place into one can be difficult or even impossible to access after you have purchased the QLAC.
It could be a risky investment if you later run into some sort of financial emergency and need access to those funds.
If your retirement goals do not match with the advantages of a QLAC annuity, then it may not make sense for you as a purchase. Understanding your RMD and retirement situation is big. QLAC annuities can be helpful to people who are conservative investors, retiring late or looking to potentially take advantage of a lower tax bracket.
How To Invest in QLAC Annuities
QLAC annuities aren’t savings accounts. They’re financial products sold by private companies. If you’re considering investing in one, be sure you’re dealing with a reputable company.
Annuities aren’t FDIC-insured, so selecting a provider that has a strong financial standing and a track record of stability can help lessen your risk. You can assess the health of the annuity issuer with credit ratings from agencies such as A.M. Best, Moody’s, Fitch or Standard & Poor’s.
There are also limits on how much money you can place into a QLAC. Because the investment serves to protect against outliving your savings, it makes little sense to place most or all of your retirement savings into this product.
The most money you can invest into a QLAC annuity is $200,000.
When looking to invest in a QLAC, it can also make sense to double-check that the investment makes sense. Talking to a qualified financial advisor may help ease any doubts about whether a QLAC is right for you.
Comparison with Other Annuities
There are a few key differences between QLACs and other types of annuities. The biggest difference may be how they are funded.
A QLAC is a deferred annuity, but it is funded directly from your existing retirement savings. Other types of annuities do not have to be directly funded from something like a 401(k) or IRA.
Other types of annuities may also pay out earlier in retirement. Immediate annuities usually pay out when you first invest in them. But QLAC annuities don’t pay out until late in retirement, offering built-in security that you don’t have to worry about outliving.
QLAC annuities can be safer investments than other types of annuities because they protect against the swings in the market once they’re invested. Variable annuities, for example, fluctuate heavily with the performance of the economy.Enjoy a Safe & Secure RetirementLearn how annuities provide premium protection, guaranteed retirement income and long-term care benefits through our partner Annuity.org.
Candidates for QLAC Annuities
QLAC annuities may not make sense if you have serious health conditions or don’t expect to live late into retirement. The great advantage of these products is their ability to provide income for those who could exhaust their savings.
It may not make sense to invest a significant chunk of your 401(k) or IRA into a QLAC annuity if you’re unlikely to live long enough to receive payouts.
If you have a history of long lifespans in your family or are perfectly healthy late into life, then a QLAC annuity could be an option for you to consider.
Those who are risk-averse also make suitable candidates for QLAC annuities. The products provide security with little additional risk.
Frequently Asked Questions About QLAC AnnuitiesCan you cancel or withdraw your investment in a QLAC annuity?Rules on canceling or withdrawing annuities vary, but it may be difficult to get your money out of a QLAC once you’re invested. Be sure a QLAC makes sense for you before you buy one.What happens to a QLAC annuity when you pass away?What happens to a QLAC when you die may depend on what type of plan and provider you have. Some QLACs may cease paying out when you die. Others may pay a benefit to your beneficiaries if some of the principal remained.What are the IRS rules and limits associated with QLAC annuities?You’re not allowed to place more than $200,000 of your retirement savings into a QLAC annuity. Also, the QLAC must be taken by age 85.Last Modified: May 17, 2023Share This Page
3 Cited Research Articles
- Internal Revenue Service. (2023, January 18). About Form 1098-Q, Qualified Longevity Annuity Contract Information. Retrieved from https://www.irs.gov/forms-pubs/about-form-1098-q
- United States Senate. (2022). Secure 2.0 Act of 2022. Retrieved from https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
- Federal Register. (2014, June 27). Longevity Annuity Contracts. Retrieved from https://www.federalregister.gov/documents/2014/07/02/2014-15524/longevity-annuity-contracts
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