Longing for Income
- A Qualified Longevity Annuity Contract (QLAC) is a new tool allowing retirees to defer income—and mandatory distributions—until much later in life than standard IRAs or 401(k)s allow.
- QLACs pay off if you live for a long time—i.e., longer than the insurance company actuarial tables predict you will.
- Just remember, QLACs are irrevocable and not very flexible, and returns can be modest.
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Remember the old joke about the 85-year-old who has an annual physical? The doctor says, “I’ve got good news and bad news. The good news is you’re going to live forever. You’re strong as an ox. The bad news is, I understand you’re running out of money.”
Now for some of us, that’s not very funny. Americans are living longer than ever before, and with that longevity comes the frightening prospect of outliving their money. In response, the IRS and the Department of the Treasury issued a new instrument in 2014 called a QLAC.
A QLAC is a deferred income annuity contract that you can buy within a defined contribution retirement plan or IRA. Since it’s issued by an insurance company, it’s guaranteed by the insurer. Another benefit is that QLACs are not subject to the normal requirement distribution rules that start at age 70½. So you can defer taking distributions from the policy until as late as age 85, which can have big tax advantages.
How QLACs work
The maximum premium you can put in up front is $125,000. The insurance company typically will refund all of your premium to your heirs if you die prior to the distribution phase you select. A QLAC will give you modest, bond-like rates of return over the long run. Again, if you die prior to the distribution period, you’re just getting your money back, so it’s not a great deal.
So why invest in a QLAC? If you live a long life, you’re going to make a much better internal rate of return on your money than if you die early—which is what the issuing insurance company is “banking on.”
What are some of the cons? QLACs are irrevocable. Once you invest your money in a QLAC, you can’t withdraw it. You have to let it defer until the age at which you originally selected to start taking distributions. You’ll typically have the choice of life only or other annuity choices for the distribution phase of the QLAC.
So, should you consider purchasing a QLAC? Yes, if you feel confident that you’ll live a long time and want an income stream to supplement Social Security when you reach age 85, 90 or beyond. That is the basic key advantage of a QLAC. Other than that, there are not many other benefits to a QLAC.
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