WHAT is a QLAC?

The IRS adopted regulations in July, 2014 (Regulation 401(a)(9)) defining a QLAC and providing special treatment for it. Specifically, a QLAC is a Qualifying Longevity Annuity Contract that can be purchased from an IRA as well as from a 401(k) qualified retirement plan.

Think of a QLAC as a deferred pension providing guaranteed lifetime income starting at an age you choose (but not later than age 85). Before this deferred pension begins making income payments, there are no required minimum distributions (RMD) and thus no current tax.

While many life insurance companies will offer QLACs, because of the long term nature of the contract, a QLAC should be purchased from highly rated insurance companies. As such, it should be considered a conservative part of your retirement investment portfolio, like a highly rated bond.

The IRS imposed certain conditions on QLAC, which must be reflected in these contracts issued by insurance companies. The first Insurance company started issuing QLACs in November 2014, and more have entered the market since.

HOW much more income can I get with QLAC?

Allocating funds to a QLAC can generate a sizable amount of additional lifetime income. Each investor's result will depend on the amount invested, his or her unique circumstances, and particularly the survival age. As longevity insurance, the longer an investor lives, the greater the QLAC advantage.

Besides the survival age, the QLAC advantage depends on the type of QLAC Plan and the Return of Premium feature which provides protection for the beneficiary in case of the investor's death before the Income Start Age.

Here are three popular QLAC Plan options:
1. By selecting Max Deferral the investor is deferring payments (and taxes thereon) until the Income Start Age selected.
2. By selecting an Income Plan, the investor is phasing in guaranteed income at ages 75, 80, and 85
3. By selecting a Balanced Plan, the investor is combining the deferral of certain payments until age 85, while phasing in income at ages 75 and 80.

The chart below shows illustrative advantages of QLAC vs a typical withdrawal strategy.

Note:   All income amounts are based on Go2Income market based pricing methodology and do not reflect any particular insurer’s pricing. The form of annuity is life only with no refund. All rates were based on market conditions earlier this year. For a current quote go to the QLAC Shortcut.

The advantage is based on a comparison of QLAC payments to Required Minimum Distributions withdrawn from a high-quality fixed income IRA portfolio fund earning 3% after fees. Results are carried out to a survival age of 95. Payments include (1) periodic amounts paid to annuitant(s) through the selected survival age, and (2) any residual amount paid to the beneficiary at the survival age. A negative "Advantage QLAC" will likely occur if a relatively early survival age is elected.

If you'd like to determine the relative advantage or disadvantage of a QLAC, go to Step 2.

MAXIMUM QLAC premium

Single Female Age 62 Wants Security

Situation:

Denise, age 62, accumulated nearly $300,000 in 401(k) savings over her working career. Denise has no pension and has a small amount in personal savings for emergencies. Her parents are both alive, and in their early 90s. Denise decides to invest in a Qualifying Longevity Annuity Contract (QLAC). Without any beneficiaries to depend on her, and to maximize her future income, Denise chooses not to elect the Return of Premium protection.

Solution:

Denise rolls over $225,000 of her $300,000 401(k) balance into a self-directed Rollover IRA account, and the remaining 25% ($75,000) to a QLAC, electing to defer income from the QLAC until age 80. Starting at age 80, Denise can expect $16,800 a year in guaranteed income from the QLAC, which translates to $224 for each $1,000 of allocation. The balance in the Rollover IRA account is invested in a diversified portfolio of mutual funds from which she can make periodic drawdowns, and/or purchase non-QLAC guaranteed annuities.

Married Couple 70:67 Wants Predictability

Situation:

Ron, age 70, and Karen, age 67, have been married 30 years; they want predictability of income that lasts as long as both or either are still living. Ron has $500,000 in Rollover IRA savings, and Karen has $100,000 in a Tax Sheltered Annuity. They want to avoid the fluctuations in each year's Required Minimum Distributions. Ron does not elect the Return of Premium protection, Karen does.

Solution:

Ron allocated $125,000 into a structured Qualifying Longevity Annuity Contract (QLAC) which will guarantee $5,976 starting at age 75, increase to $9,566 at age 80, and then to $12,883 at 85. This income will be paid as long as either Ron or Karen is alive. Karen also allocates $25,000 (the 25% maximum allowable) into a QLAC with a deferred income payout starting at $5,420 at age 85. With these guaranteed "pensions for life" in place, Ron and Karen can invest the balance of their accounts more aggressively should they wish to do so.

Husband 73 and Wife 70 Want to Reduce Current Taxes

Situation:

Jack, age 73, and Ginny, age 70, are looking to reduce the taxes on their Required Minimum Distributions since they have income from other sources. Jack has $350,000 in a Rollover IRA, and Ginny $450,000 in her Rollover IRA account. They decide to each purchase a Qualifying Longevity Annuity Contract (QLAC) for the tax benefits as well as the peace of mind it provides. Because they have provided for their beneficiaries in other ways, neither Jack nor Ginny elect the Return of Premium protection.

Solution:

Jack decides upon a structured QLAC, allocating the allowable 25% maximum amount of $87,500. At age 75, Jack begins to receive $4,862 of guaranteed income starting at age 75, increasing to $9,352 at age 80, and to $13,153 at age 85. Ginny elects the 25% QLAC maximum deferral option on her $450,000 Rollover IRA account which will pay out $31,590 starting at her age 85.