Qualified longevity annuity contracts (QLACs) are popular retirement vehicles for those who want to create a deferred income stream later in life using pre-tax, qualified dollars.
Longevity contracts were approved by the IRS in June of 2014 and offer very attractive tax reduction strategies.
Many institutions offer these plans, but products like annuities from insurance companies are uniquely suited as they guarantee deferred future income payments.
With fewer employers offering pensions, the need for guaranteed retirement income using safe and insured investments has grown. A QLAC can be the answer for individuals and groups who wish to earmark qualified funds to create future income streams.
Longevity Annuities Grow & Lower Taxes
There are several advantages to deferred annuities including Required Minimum Distribution reductions, lower taxes, additional time for tax-deferred growth, future income streams, and simplicity.
Many investors like QLACs as they lower taxable income from RMDs at age 70 1/2 or 73 – depending on which applies to you. Your invested funds will postpone RMD withdrawals for years and allow for additional compounding tax-deferred growth. Distributions are then withdrawn later when needed or when taxable income is less.
Rules have recently changed for the amount you can contribute to a QLAC. In 2023, you are able to invest up to $200,000 so long as this amount is 25% or less of your total qualified accounts. Qualified money is from a source like an IRA, 401(k), or 403(b).
Income payments can then be deferred up to age 85. This reduces current RMD amounts while also deferring taxable income, compounding growth, and creating a much larger stream of income when it might be needed most.
Deferred income annuities are uniquely suited for QLAC as they establish a large (potentially increasing) income stream later in life.
More people are working past their 60’s and into their 70’s. It’s beneficial for some to postpone taxable RMDs until they are needed. This allows for additional time to grow your investment and a guaranteed income past your working years.
QLACs are popular as they have few moving parts. Only fixed annuities are used – no variable or indexing products are allowed. There are no ongoing fees for fixed annuity accounts and agent commissions don’t reduce your principal. (Typically agent commissions are much lower on fixed annuities when compared to variable and indexed products.)
QLAC Rules & Regulations For Tax-Deferral
A QLAC is a type of deferred income annuity, but not all deferred income annuities are QLACs. Many deferred annuities will not meet the specifications required by the IRS to be a Qualified Longevity Annuity Contract. The IRS says these parameters must be met for a policy to qualify:
- Only qualified, pre-tax money can be used – like IRA, 401(k) and 403(b) dollars
- Up to $200,000 (for 2023) – of your retirement account can be invested
- Contributions cannot exceed 25% of your total tax-qualified portfolio
- Income must be based on a single or joint life, but cannot include a period certain
- Payouts must begin at age 85 at the latest, but can begin earlier
- Variable and indexed annuities cannot be used – only fixed accounts
It’s important to know several insurance companies allow you to build in inflation protection to your annuity account. Yearly (or monthly) payments will increase by a predetermined value each year (usually 3-5%) or by changes in an inflation index like the CPI. This way, annuity owners know their payments will grow each year.
And if you established a QLAC when contributions amounts were lower, you can still invest the additional amounts in a new or existing QLAC. The IRS is allowing maximum amounts to increase most years.
What Happens To The Remaining Funds At Passing?
How your QLAC is set up will determine what happens at passing. If it’s established as a life-only plan, then all payouts will cease with no residual payouts at passing. Joint plans will continue to a living spouse at passing. And those with a cash refund would return any remaining funds to your named beneficiaries at passing.
Single-life annuities offer the largest payouts. If you’re concerned about your beneficiaries inheritance, then establishing a cash refund is prudent. If you pass away before your income stream has begun, the accumulated value (principal & growth) goes to your named beneficiaries.
To be clear: It is only when you set up a “life only” plan will the insurance company keep any residual funds at passing. Life-only plans are not very common and only used when an owner is more concerned with maximum income.
Contact Us For Quotes, Illustrations & Additional Information
Several large, well-known annuity carriers offer QLACs including: AIG, American General, Brighthouse, Lincoln Financial, Mass Mutual, Mutual of Omaha, New York Life, Pacific Life, Principal, Western Southern, and a few others.
We work with all of these carriers and can help you find the deferred income annuity that best suits your long term needs. Contact us today for more information.