Purchasing a QLAC in a Tax-Deferred Plan

Purchasing a QLAC in a tax-deferred plan involves investing in a deferred income annuity within retirement accounts like IRAs and 401(k)s. It provides guaranteed income starting at an advanced age, typically 85. Benefits include tax deferral, RMD exclusion and lifetime income, while drawbacks include limited liquidity and inflation risk.

John Stevenson, Owner and Advisor at Stevenson Retirement Solutions
  • Written By
    John Stevenson, CFF

    John Stevenson, CFF

    Owner and Advisor at Stevenson Retirement Solutions

    John Stevenson, a Certified Financial Fiduciary®️, specializes in securing retirements with tax-free accounts. With a focus on guaranteed retirement, he's ensured none of his clients suffer from market fluctuations. As a renowned educator and podcast host, John empowers thousands weekly, sharing his expertise in minimizing taxes and protecting against financial downturns.

    • Certified Financial Fiduciary®️
    • Host of the popular Guaranteed Retirement podcast and YouTube channel
    • Studied Finance and Business

    Read More
  • Edited By
    Michael Santiago
    Headshot of Michael Santiago, senior editor for Annuity.org

    Michael Santiago

    Senior Financial Editor

    Michael Santiago is a skilled writer and editor with over a decade of experience in various industries. As a senior financial editor, he collaborates with a team of experts to develop compelling and accurate content.

    Read More
  • Financially Reviewed By
    Aamir M. Chalisa, MBA, LUTCF, MDRT
    Aamir M. Chalisa, MBA, LUTCF, MDRT

    Aamir M. Chalisa, MBA, LUTCF, MDRT

    General Manager at Futurity First Insurance Group

    Aamir M. Chalisa is the GM at Futurity First, leading Oak Brook's top branch. With 30+ years' expertise, chairs GAMA Global, driving diversity worldwide.

    Read More
  • Updated: May 29, 2024
  • 6 min read time
  • This page features 2 Cited Research Articles

Key Takeaways

  • QLACs offer a steady income stream for life, providing financial security and reducing the risk of outliving savings.
  • Investing in QLACs can lower your taxable income by excluding QLAC investments from RMD calculations and deferring taxes until distributions begin.
  • Funds invested in a QLAC are generally inaccessible until annuity payments start, which can be a drawback if unexpected financial needs arise.
  • QLAC payments are typically fixed and may not keep pace with inflation, potentially reducing purchasing power over time.
  • QLACs can be complex, with various terms and fees. It’s important to understand these aspects and consult a financial advisor before purchasing.

Planning for a secure and a comfortable retirement is a top priority for many individuals. With various investment options available, it’s essential to choose strategies that align with long-term financial goals. One such option is investing in a Qualifying Longevity Annuity Contract (QLAC) within a tax-deferred retirement plan. This article will explore the benefits and drawbacks of QLACs, providing a comprehensive guide for potential investors.

QLACs in Tax-Deferred Plans

A Qualifying Longevity Annuity Contract (QLAC) is a type of deferred income annuity specifically designed for retirement accounts, such as traditional IRAs and 401(k)s. The primary purpose of a QLAC is to provide guaranteed income later in life, typically starting at age 85. This income stream can be a critical component of a retirement plan, offering financial security and peace of mind during the later years of retirement.

How QLACs Work

Tax-Deferred Growth
Contributions to a QLAC are made from tax-deferred retirement accounts, and the growth of the QLAC investment remains tax-deferred until distributions begin.
Deferred Income
The annuity payments from a QLAC start at a predetermined age, allowing individuals to defer receiving income until it’s needed most.
RMD Exclusion
QLAC investments are excluded from required minimum distribution (RMD) calculations, potentially reducing taxable income during the early retirement years.

Benefits of Purchasing a QLAC in a Tax-Deferred Plan

Investing in a QLAC within a tax-deferred retirement plan offers several notable benefits. By choosing a Qualified Longevity Annuity Contract (QLAC), individuals can secure a steady income stream in their later years, providing financial stability and peace of mind. Additionally, a QLAC helps to defer required minimum distributions (RMDs), potentially reducing taxable income and optimizing retirement savings.

Guaranteed Lifetime Income

A significant advantage of QLACs is the assurance of a steady income stream for life. This can be particularly beneficial for retirees concerned about outliving their savings. Knowing that a portion of their income is guaranteed can provide a sense of financial security and stability.

Tax Benefits

By excluding QLAC investments from RMD calculations, individuals can lower their taxable income during the initial years of retirement. This strategic deferral of RMDs allows for more efficient tax planning and potentially reduces the tax burden. Additionally, taxes on the QLAC investment are deferred until distributions begin, enabling the investment to grow more effectively over time. This combination of reduced immediate taxable income and deferred taxation makes QLACs a valuable tool for optimizing retirement savings.

Flexibility and Control

Retirees have the flexibility to decide the amount invested in a QLAC (up to regulatory limits) and the age at which income payments begin. This control allows for tailored retirement planning that meets individual needs and circumstances.

Risk Mitigation

Investing in a QLAC can mitigate the risk of market volatility affecting retirement income. Unlike other investments that may fluctuate with market conditions, a QLAC provides a predictable and stable income, regardless of economic changes.

Step 1
Step 2
Step 3
Step 4

How soon are you retiring?

Step 1
Step 2
Step 3
Step 4

What is your goal for purchasing an annuity?

Select all that apply

Drawbacks of Purchasing a QLAC in a Tax-Deferred Plan

While QLACs provide numerous benefits, it’s important to also consider the potential drawbacks. Understanding both the advantages and disadvantages of QLACs can help individuals make more informed decisions about their retirement planning.

Limited Liquidity

Once funds are invested in a QLAC, they are generally inaccessible until the annuity payments begin. This lack of liquidity can be a disadvantage if unexpected financial needs arise before the income start date.

Inflation Risk

QLAC payments are typically fixed and may not keep pace with inflation. Over time, the purchasing power of the fixed annuity payments may decrease, which could impact the retiree’s standard of living.

Complexity and Fees

QLACs can be complex financial products with various terms, conditions and fees. Understanding these complexities is crucial to ensure that the product aligns with retirement goals. Additionally, fees associated with QLACs can vary and may reduce the overall benefit.

Process of Purchasing a QLAC in a Tax-Deferred Plan

Purchasing a QLAC involves several steps, each is important for ensuring a well-informed decision. Here’s a step-by-step guide to help navigate the process and make the most of your investment.

Begin by researching reputable insurance companies or financial institutions that offer QLAC products. Consider factors such as the company’s financial stability, product offerings and customer service reputation. Some leading insurance carriers offering QLACs include, Guardian Lincoln Financial, MassMutual, Mutual of Omaha and MetLife.

Moreover, evaluating QLAC options is an essential step in securing your financial future. By carefully comparing different Qualified Longevity Annuity Contracts, you can select the best plan that aligns with your retirement goals and needs.

Evaluate different QLAC products based on:

  • Payout Options: Consider whether the QLAC offers inflation-adjusted payments or other payout options.
  • Income Start Date: Determine the optimal age for annuity payments to begin.
  • Fees and Costs: Review all associated fees and understand their impact on the investment.

To ease the process, it’s important to consult with a financial advisor, who can provide personalized guidance and help ensure that the QLAC aligns with your overall retirement strategy. Advisors can also assist with understanding the detailed terms and conditions of the QLAC.

Lastly, once you have selected a QLAC, work with the provider to complete the necessary paperwork. 

This includes:

  • Application Forms: Fill out and submit the required application forms.
  • Transfer of Funds: Transfer the designated amount from your tax-deferred retirement account to the QLAC.
  • Confirmation: Ensure that all details are accurate and that you receive confirmation of the purchase.

Investing in a QLAC within a tax-deferred retirement plan can be a strategic move to secure guaranteed income later in life while benefiting from tax advantages. However, it’s crucial to weigh the benefits against potential drawbacks, such as limited liquidity and inflation risk. By understanding the process and consulting with a financial advisor, individuals can make informed decisions that align with their retirement goals. A QLAC can be a valuable component of a comprehensive retirement strategy, offering peace of mind and financial stability in the golden years.

Frequently Asked Questions

What is the maximum amount I can invest in a QLAC?

As of the new IRS rules in 2024, the maximum amount you can invest in a QLAC is now $200,000, and there is no percentage limit of your tax-deferred retirement account balance.

When do QLAC payments begin?

QLAC payments typically begin at a predetermined age, often between 75 and 85, as specified in the contract.

Are there any fees associated with QLACs?

Yes, QLACs may have associated fees, including administrative fees, management fees and other costs. It’s important to review and understand these fees before purchasing.

How do QLACs affect RMDs?

Investments in QLACs are excluded from RMD calculations, potentially reducing the amount of taxable income during the early years of retirement.

Can I change the terms of my QLAC after purchase?

Generally, the terms of a QLAC are fixed at the time of purchase and cannot be changed. It’s essential to thoroughly understand the terms before committing.

Still have questions?

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: May 29, 2024
Annuity agent on a phone call
Learn About Top Annuity Products Get a Free Annuity Quote from a Licensed Agent
Annuity rates on a screen
Find Today's Best Annuity Rates Compare Today's Best Annuity Rates
Annuities Explained PDF on a tablet
Get Your Annuities Explained PDF Download Your Free Annuities Explained Guide