Tax Tip Tuesday: Defer Taxes and RMDs – The Appeal of QLACs

Mar 7, 2023

By Dan Schulte, Senior Vice President and Manager, Annuities and Insurance
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Qualified Longevity Annuity Contracts (QLACs) are issued by insurance companies, and offer deferred future lifetime income, purchased with retirement plan dollars. Income payments on this type of contract are usually structured to begin much later in life. A requirement of a QLAC is that income payments must begin no later than the month following the month when the client reaches age 85, although they can begin earlier. The annuity income payments are guaranteed by the carrier to be paid for the rest of the policyowner’s life regardless of how long they may live, meaning that these types of contracts can provide a significant hedge against longevity risk. Policyowners also have the option of choosing a joint payout option to benefit a surviving spouse or a lump-sum distribution to beneficiaries if the QLAC payments are never needed. Once QLAC payments begin, the amounts are subject to ordinary income tax just like any other traditional retirement account distribution.

Required Minimum Distributions (RMD)
QLACs can be beneficial because the retirement account assets deposited to the QLAC are excluded when the owner calculates RMDs. This allows the client to reduce or eliminate the ordinary income tax liability at normal RMD start age of 73 by deferring it until a later age (but no later than age 85).

New Legislation
The recently passed SECURE 2.0 Act modified the previous rule that limited the value of the QLAC to $155,000 by raising the cap to $200,000 (the $200,000 limit will be indexed for inflation in future years).

This latest update on the QLAC rules could significantly increase the appeal of these types of longevity insurance contracts going forward. In addition, the recent rise in interest rates have allowed insurance carriers to increase the payout guarantees from these contracts. These products can offer significant protection against running out of retirement funds in old age, especially if an individual’s portfolio deteriorates due to bad market conditions, or if withdraws are more than anticipated earlier in retirement. With proper planning, having a QLAC in place could allow an individual to feel more comfortable taking larger withdrawals from the portfolio in retirement, knowing they have a secure lifetime income stream in place should he or she live into their late 80s, 90s, or even over 100.

QLACs Are Not for Everyone
A QLAC is a fixed annuity product, meaning the QLAC itself is vulnerable to inflation risk over time. Inflation protection riders may be available, but these features can be expensive and can reduce the client’s actual annuity payment. Also, QLACs are totally illiquid, meaning funds could not be used in the future by the client to take advantage of favorable market conditions. The most important factor to consider when purchasing a QLAC would be longevity. If there is a significant health history, the purchase of a QLAC might not make sense as there may be a good chance the individual may not live long enough to experience the benefits. QLACs are certainly more beneficial for individuals that are relatively healthy and have a good chance of experiencing longevity in the future. That is why QLACs can especially benefit women, who are the most likely to live longer in retirement than men.

QLACs could be an effective tool for you to use in retirement but are not for everyone. To get additional information to see if QLACs are right for you, contact your financial advisor.


Benjamin F. Edwards does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.