What Is a QLAC Annuity? Benefits, Rules, and How It Reduces RMDs

• Use our list below to understand the pros and cons of a QLAC
• Guarantee income in retirement with a longevity annuity starting after age 85
• Choose features and options to customize your QLAC to your needs
• QLACs can help reduce your required minimum distributions (RMDs)

Figuring out how long your retirement savings need to last is difficult. Guaranteed retirement income and a paycheck you won’t outlive sounds like a dream, right? Well you can purchase a QLAC (also known as a Qualified Longevity Annuity Contract), which provides exactly that! Buying a QLAC with your pre-tax retirement savings has a number of benefits, but also some drawbacks. We cover both below:

• By buying, you’ll know you won’t outlive your savings

Insurance is typically thought of as something you buy to protect you and your family from unfortunate events. The QLAC offers a more pleasant kind of protection though: longevity insurance, meaning it protects you from outliving your savings. The longer you live, the more financial value the QLAC provides.

• Defer taxes and required minimum distributions

Required minimum distributions (RMDs) are mandated by the Internal Revenue Service and require withdrawals from pre-tax retirement accounts once you reach a certain age.

Under current law:

• RMDs begin at age 73 if you were born between 1951–1959
• RMDs begin at age 75 if you were born in 1960 or later

Money allocated to a QLAC is excluded from RMD calculations until income payments begin (no later than age 85). This can allow you to defer taxes longer and reduce the size of required withdrawals in early retirement.

You can allocate up to $200,000 (indexed for inflation) of qualified retirement savings into a QLAC. The previous 25% account balance limit no longer applies, giving retirees more flexibility in how much they choose to protect with guaranteed income.

• You can add your spouse to your policy

QLACs can be set up as joint annuities, which means that the paychecks continue as long as either you or your spouse live. Structuring the contract this way is a great way to preserve financial stability and quality of life for the surviving spouse. While joint coverage typically results in lower monthly payments, it provides income protection for a longer period of time.

• You can plan your riskier investments more easily

Adding a QLAC to your portfolio can make retirement planning easier. Knowing that you’ll be receiving a steady paycheck later in retirement to cover all or some of your essential expenses means you may feel more comfortable taking measured risk with the rest of your investments.

• Your savings are protected from the market and the income you’ll get is pre-determined

The savings you allocate to a QLAC aren’t invested in the market, so they won’t be affected by swings in the stock or bond markets. Your future income is determined upfront and guaranteed by the insurer.

Depending on the policy features you choose, you may also be able to add survivor or beneficiary protections. This can also be a drawback for some people. Because the income is fixed, it won’t increase if markets perform well. If you’re looking for an investment-style product with growth potential, a QLAC may not be the right solution.

• No cash value, and limited flexibility

QLACs are designed to provide future income rather than function like savings accounts. Once you purchase a policy, your funds are generally not accessible.

Most contracts do not allow withdrawals or lump-sum access to principal. Some insurers may offer limited payment acceleration or commutation features, but these vary and shouldn’t be relied upon for liquidity. It’s best to view QLAC funds as long-term, committed assets.

This lack of flexibility can be a downside if you expect to need access to the money.

• It’s a simple product

Unlike many insurance products, the QLAC has a straightforward structure. For every dollar you contribute, the insurance company tells you how much you’ll receive each month starting at your selected income date and continuing for life. While there are a few optional features that can affect payment levels, the product is generally simple and easy to understand.

• QLACs work as an alternative fixed income investment

While QLACs are primarily insurance products, the value they offer can be compared to low-risk fixed income investments such as high-quality bonds. As you approach retirement and want to reduce equity market risk, allocating a portion of your savings to guaranteed lifetime income can help create stability and make your overall retirement plan more predictable.

QLACs are a great way to make retirement planning simpler. When used thoughtfully, they can provide guaranteed income, reduce RMDs, and help create peace of mind later in life.