QLAC is an acronym for Qualified Longevity Annuity Contract. A QLAC pays you a monthly amount beginning at any age you choose up to a maximum of 85 years of age. The monthly amount and start age are specified in the contract when it is established. QLACs are funded by a rollover from an existing pre-tax retirement plan. A rollover is the transfer of money from one retirement plan to another without creating a taxable event. A pre-tax retirement plan, also known as a qualified plan, is a tax-advantaged account funded with pre-tax dollars such as a 401(k) or traditional IRA (Individual Retirement Account).

QLAC Pros and Cons

Before we get into the pros and cons of a QLAC, let's look at annuities in general. As discussed in How Does an Annuity Work?, annuities provide a steady stream of retirement income no matter what the stock market is doing. Annuities do not place your capital at risk and your savings grow tax-free at a guaranteed rate.

Sounds great, so why doesn't everyone have an annuity? Because all that surety comes at a cost. Businesses exist to earn a profit, and companies that sell annuities are no exception. They make money by setting the guaranteed annual return considerably less than historical returns on Wall Street. How much less? The average guaranteed annual return on an annuity is about 2 percent, and the average annual return on equities is about 10 percent.

The primary benefit of a QLAC is the ability to defer RMDs (Required Minimum Distributions) until the age you begin receiving payments, the QLAC start age. As discussed in How to Deal with Required Minimum Distributions, RMDs are government-mandated withdrawals from pre-tax retirement plans which must be taken each year beginning at age 72. You funded your 401(k) or traditional IRA with pre-tax dollars. When you reach 72 years of age, the IRS wants their money. RMDs typically have the effect of driving up your tax bill, and a QLAC can keep that from happening.

Plan Limitations

Like all tax-advantaged plans, the IRS places limits on the amount that may be rolled over into a QLAC. At present, QLAC rollovers are limited to 25% of the retirement account balance or $200,000, whichever is less.

Risk Factors

One risk factor associated with a QLAC is the financial strength of the company that issues it. If they go out of business, you could be left holding the bag. It's best to stick with established companies that have been in business many years and show no signs of financial instability. The other risk is that you may not live to the QLAC start age.

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