Key Facts

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  • QLAC Background
  • Required Minimum Distributions
  • QLAC Benefits
  • QLAC Maximum Investment
  • Return of QLAC Premium In The Event of Premature Death
  • QLAC Annuity Versus Other Annuities
  • Why do they call it a 'longevity annuity?'

In July, 2014, the US Government approved new rules inviting life insurance carriers to develop a new investment product.  This new product is designed to help retirees avoid outliving their assets. The QLAC (pronounced "cue-lack") is short for Qualified Longevity Annuity Contract  and, up to certain limits, may be purchased using qualified retirement account assets (e.g. IRA funds) without incurring a tax penalty.  The QLAC may also be used to reduce Required Minimum Distributions payable by retirees over the age of 70 and one half. Visit our videos page or click the button below to learn more.

 

IRAs and similar retirement savings plans are subject to Required Minimum Distribution or “RMD” tax rules.  Under IRS rules, assets held by an IRA owner compound tax-deferred.  In retirement, distributions from qualified retirement savings plans (such as IRAs) are treated as taxable, ordinary income.  RMD rules force older taxpayers, those over the age of 70 and 1/2, to receive distributions and pay tax on past contributions and earnings in their qualified retirement savings accounts. If a Required Minimum Distribution is not distributed after age 70 and 1/2, a 50% penalty is imposed on the amount by which distributions during the year fell short of the RMD.  Good news  -- a QLAC purchase can substantially reduce the required RMD distribution amount and the corresponding tax obligation - without creating penalty for the taxpayer.  Click here to go to our 1-2-3 RMD Calculator Page, or click the button below to open a popup calculator.

 

  • The IRS requires that QLAC annuity payments be for the life of the owner of the contract (or the owner and his/her spouse.)  Once started, QLAC annuity payments continue until death of the annuitant(s), no matter how long the annuitant (or annuitants) live.

  • QLAC investments are not counted as IRA assets for the purpose of the calculation of Required Minimum Distributions (RMD).

  • QLAC investors may wait until age 85 to receive payments from their QLAC annuity investment, in effect deferring taxable income from early in retirement when it is not needed to later on in the retirement years when it is. 

  • In reducing RMD, QLAC investments can reduce the amount of taxes payable in the early years of retirement.

  • QLACs by providing lifetime income, allow purchasers to insure themselves against longevity risk, the risk of living long enough to outlive their retirement assets.

Want to learn more? Go to our Frequently Asked Questions Page or click the button below to see what your QLAC benefit would be.

The amount an investor may invest in a QLAC is limited to the lesser of 25% of qualified assets (assets held in tax-qualified accounts such as an IRA) or $130,000. This $130,000 lifetime maximum was increased from $125,000 on January 1, 2018 and will increase from time to time thereafter.   Click here to see a short video describing a single investor QLAC purchase. However, it is important to note in this day of two income households that QLAC contribution limits follow the individual.  So, for example, if both members of a married couple have IRA’s under their own name, each with balance $520,000, both individuals may purchase their own separate QLACs, each with a maximum balance of $130,000.  After the two separate QLAC purchases, the combined QLAC assets of the couple will be $260,000.  Click here to see a video with a dramatization of couple making a double QLAC purchase.

 

The tax rules allow QLAC contracts to pay a Return of Premium (“ROP”) death benefit when the contract owner dies before collecting payments equal to the QLAC premiums paid. The ROP equals the balance of premiums not recovered via annuity payments. Click the button below, complete the mini-form and click Get My Quote in order to see a comparison between life-only and ROP annuity benefits for someone with your fact pattern.

 

What is the key difference between the purchase of a Qualified Longevity Annuity Contract (QLAC) and other annuities? 

A QLAC solves many problems faced when a retiree wants to use IRA funds to buy an annuity.  Examples include:

  • Withdrawing funds from the IRA to pay a premium for a non-QLAC annuity subjects the entire withdrawal to taxation.  

  • Purchasing an immediate annuity inside the IRA does solve the withdrawal tax issue, but requires the purchaser to receive distributions in early retirement years when the retiree may prefer deferring receipts.  

  • A deferred annuity owned by the IRA, unlike a QLAC annuity, has its value included in the Required Minimum Distribution calculation, thereby requiring a higher percentage of non-annuity assets to be distributed.  

A QLAC purchase, on the other hand...

  • Permits the buyer to use IRA assets for the QLAC purchase without taxation on the transferred assets, up to the lesser 25 percent of IRA assets or $130,000.  

  • Permits the owner to defer receipt of annuity income to the owner's 85th birthday, thereby assuring that the purchaser will have income during the later retirement years when it is most needed.

  • A QLAC annuity's value, unlike other annuities, is not counted by the IRS when a taxpayer over 70 and 1/2 computes his or her assets that are subject to yearly Required Minimum Distributions (RMDs).  (Please see discussion of RMD above.)

Longevity is a measure of how long people live.  Recent longevity statistics from the Social Security Administration and other sources tell us that about half of men who reach the age of 65 will live past age 82.  Fifty percent of women will live past age 86.  A Qualified Longevity Annuity Contract will pay monthly income as long as the annuitant lives if he or she is in the lucky fifty percent that lives a long life.  If the annuity owner is among the unlucky 50 percent that dies early, the QLAC (with return of premium elections) returns the invested premiums to the annuitant’s heirs.  The longer the annuitant lives, therefore, the higher the return on the QLAC purchase!  This is why people sometimes refer to QLACs as “Longevity Annuities” or just plain “longevity insurance.”  It is insurance for people who intend to live long lives.  Click to learn about our Failsafe(SM) Strategy for maximizing income during retirement. 


Want to learn more? Check out our videos page to see additional QLACguru videos.  See our calculators to develop an anonymous RMD calculation and estimated QLAC quote. Answer specific questions by going to our Knowledgebase page.  Visit our blogs page for in-depth articles on a variety of topics including how QLACs help with Sequence Risk, how QLACs are similar to and different from Social Security, best practices in buying a QLAC as well as many other topics.

Free Consultation.  If you would like us to develop a free RMD analysis and illustration of how a QLAC might work for you, please click here.


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