Planning for retirement should cover every aspect of your financial situation to guarantee that you will have sufficient money to live the lifestyle you want when you get older. People often make every effort to save money to have sufficient funds for their retirement years. You will need to have insurance and a retirement plan to maintain your preferred standard of living once you retire.
It is only natural for people to believe that their retirement savings will be sufficient to fund their remaining years. But what if you live a lot longer than you anticipate and all the money you’ve saved is gone? Even the best golden years will come to an end — make sure your retirement planning includes your entire life.
One of the greatest ways to protect against longevity risk is with a qualified longevity annuity contract (QLAC). A QLAC annuity offers guaranteed monthly payments until death, ensuring that you will have money to live on for the rest of your golden years.
What Is a Qualified Longevity Annuity Contract (QLAC)?
A qualified longevity annuity contract, also called a QLAC, is a type of deferred annuity that is designed to provide you income after retirement — it is designed to aid people in making financial plans for their later years by offering a stream of guaranteed income that starts at a set age, usually at or after age 85.
The goal of annuities is to provide you with a steady, guaranteed income during retirement; it can be purchased in one lump amount or installments of an initial payment plus monthly, quarterly, or yearly payments. To meet various needs and demands, insurance providers may provide a variety of annuities. The majority of deferred annuities provide income during retirement years, however, QLACs are special due to their “qualified” component.
When you consider your expectations for your post-career life, you’ll probably utilize a variety of saving and investing techniques. One of these, a deferred annuity, can offer safe income in your senior years. However, when you adhere to specified IRS standards, these “qualified” agreements enable you to temporarily lower your required minimum distributions (RMDs). No matter how long you live after converting assets into an income stream, the payments will always be made. Since you select the beginning date of payments when you purchase a deferred annuity, these payouts typically occur monthly, although you might be able to withdraw at any time.
In other words, a QLAC can ensure that you have enough money for the rest of your life.
When Does a Deferred Annuity Qualify as a QLAC?
QLACs are exempted from required minimum distribution (RMD) requirements and have certain tax benefits, thus people are not forced to begin drawing distributions from their QLAC until they reach the age stipulated in the contract. The minimum payout requirement from other retirement funds may also be decreased. To qualify as a QLAC, a deferred annuity must satisfy a few conditions:
- The money must come from pre-tax retirement accounts like regular IRAs or 401(k) plans
- You may add up to $145,000 or 25 percent of the sum in your retirement accounts to the contract
- If you want to start receiving payments before you age 85, you can start accepting annuity income from the contract
How Does a QLAC Work?
A QLAC works the way a deferred annuity works: when you purchase an annuity, you’re buying a contract from an insurance or annuity firm. The contract will vary; however, you must pay premiums upfront before the insurance provider starts paying you back at a later date. Depending on how the annuity is set up, these payments may be given in a single lump amount or monthly installments.
For example, you pay for the annuity with funds from your 401(k) or IRA after deciding with the company issuing the contract when your payments should start. Until you are ready to start receiving installments, the money grows tax-deferred. Until you reach the age set out in the contract, you are not required to begin drawing distributions from your QLAC. Plus, you may also lower the minimum payout requirements for other retirement funds.
The income from your QLAC is typically distributed on a monthly or quarterly basis. It frequently serves as a complement to other retirement income sources including Social Security and pensions. As a result, QLACs work to offer a guaranteed stream of income that cannot be outlived, which is intended to assist you to manage the longevity risk — outlasting your resources.
QLAC Payout Options
There are multiple payout options for a QLAC that depend on the insurance provider and the contract provided. Here are the typical payout options available for a QLAC that may meet your needs:
- Single-life annuity: You will be given a guaranteed income stream for the rest of your life
- Period certain annuity: You will receive a guaranteed income stream for a specific number of years based on your contract
- Joint and survivor annuity: You will receive a guaranteed income stream for the rest of your life, and your beneficiary will receive a reduced income stream after you pass away
Return of premium annuity: You will have a guaranteed income stream for the rest of your life — any remaining funds in your annuity will be given to your beneficiaries after you pass away
Advantages of a QLAC
The main advantage of a qualified longevity annuity contract is that it could be a helpful instrument for retirees who want to safeguard their financial future. These annuities provide a special range of advantages that may help guarantee a consistent retirement income. Here are the key advantages of a QLAC and how it may enhance your retirement lifestyle.
Guarantees Income Stream for Life
A QLAC can offer a lifetime revenue stream that is guaranteed. You can be confident that your annuity payments will continue for the duration of your life once you start receiving them. Knowing that you will have a consistent income will give you peace of mind that your future is secured even if you have other investments or savings accounts that are performing poorly.
The insurance provider guarantees that they will keep making payments as long as you live when you start receiving annuity income. Additionally, payments could be made for the rest of a spouse’s life. You and your loved ones will be more assured that you won’t run out of money while living out your golden years.
Helps You Manage Your Tax Liability
QLAC can assist you in managing your tax obligations. Contributions to a QLAC are tax-deferred, so you won’t have to pay taxes until you start getting income from the annuity. In the short term, this can lower your tax obligation and save you money on other costs. Thanks to this agreement, you can postpone the RMD payouts on a portion of your assets. In addition, you can reduce your taxable income by making smaller withdrawals from your pre-tax reserves. That can enable you to be eligible for specific tax incentives or just lead to a lower tax burden.
Ultimately, once you reach age 85 at the latest, you will have to start taking withdrawals. When your delayed RMDs start, you could earn more money than you otherwise would. This is very important because as life expectancies rise, having the ability to set aside money for later in life becomes more crucial.
Offers Protection From Inflation
A QLAC can act as an inflation hedge; with a QLAC, you will receive higher annuity payments when the cost of living rises. This makes it possible for you to maintain your desired quality of life in retirement by ensuring that your income keeps up with the growing cost of living. In addition, QLAC can also help you in diversifying your retirement portfolio — the risk of your other assets can be balanced and you can be protected from market fluctuations by having an annuity in your retirement plans.
In the current world, it’s not surprising that practically every retired client should take the time to assess their inflation risk. Additionally, the possibility of outliving one’s retirement resources has grown to be a major concern. Due to the way QLACs are set up, you are guaranteed to have an income regardless of market conditions or inflation.
Helps Save for Long-term Care Expenses
Since long-term care and health are major concerns for seniors, a QLAC may assist with saving for these costs. If you are concerned about the price of long-term care, a QLAC can give you a reliable stream of income that you can utilize to cover these costs. This will make sure you can get the care you need while easing some of the financial load of long-term care. As a result, not only will you have enough money but also the greatest health possible to enjoy the remainder of your senior years.
Provides You a Means of Leaving a Legacy
A QLAC can offer a means by which you can leave a legacy for your loved ones. It is possible to leave your beneficiaries a tax-free inheritance if you do not spend the entire amount of your annuity during your lifetime. You may add provisions for spousal support or a return option that distributes any unused assets to your heirs. If you want to leave behind a strong legacy or have loved ones that look to you for support, setting up a QLAC is a way to ensure that your loved ones will be cared for even after you pass away.
Limitations of a QLAC
Given how advantageous a QLAC is for your retirement, there are a few limitations to take into account when setting one up.
Limited Flexibility
When you acquire a QLAC, you typically agree to take the guaranteed income for the rest of your life and are not given the choice to modify the contract’s conditions or request a lump sum payment.
Limits on Early Withdrawal
A QLAC is a retirement plan in which some required minimum distributions (RMDs) are deferred until a specific age, with an 85-year-old maximum. Early withdrawal fees could apply if you take money out of a QLAC before the age allowed under your contract.
Limit the Growth of Investments
You may lose out on potential growth in your retirement savings since assets in a QLAC are often not invested in equities or other growth-oriented products. Although your income is guaranteed, there is a low likelihood that your investment will rise in value.
Acquire QLAC With Safe Wealth Plan
It’s essential that you consider both the possible return on your investment and the degree of risk involved while saving and investing your money, especially for retirement. With how beneficial a QLAC is for retirement, you can protect your wealth using our Safe Money strategies.
Safe Wealth Plan certified experts are dedicated to Safe Wealth Planning, to protect retirees’ retirement assets and make sure they don’t outlive their retirement funds.
Take a massive step forward towards a brighter future and contact Safe Wealth Plan to meet with a licensed agent who is certified to help you put a Safe Wealth Plan in place with your QLAC.
About Qualified Longevity Annuity Contract (QLAC)