How a QLAC Works
A QLAC annuity allows you to defer the distribution of funds from employer retirement plans or traditional IRAs past age 72. You can turn those funds into a guaranteed income stream for the rest of your life that can be started as late as age 85. You don’t have to defer it for that long, but you can. More importantly, the money in a QLAC is not considered as part of your RMD calculation when you turn 72. That is a big deal because it means your taxes will be lower on your RMDs. A QLAC is the only annuity type that can do this. The maximum you can invest in a QLAC is $135,000 or 25% of your account balances. For example, if you have total non-Roth IRA assets of $540,000, you can buy a $135,000 QLAC. This represents 25% of your balance. When you calculate RMDs, the total will be based on $405,000 instead of $540,000. Because of this lower amount, your RMD taxes will most likely be lower. QLACs can be structured for a joint payout with your spouse, along with cost of living adjustment (COLA) increases. You can also set up the contract so that 100% of any unused principal money goes to your listed beneficiaries, not the annuity company. There are associated costs for this.
The Negatives of QLACs
The primary problem with QLACs is the limited amount of money you can place in them. The maximum total dollar amount you can place in a QLAC is the lesser of $135,000 or 25% of your employer retirement accounts and non-Roth IRAs. An increase of $5,000 per year has been in effect since Jan. 1, 2018, but there is no set increase schedule. Another issue with QLACs is that they don’t accumulate cash value. You can’t surrender the policy and get all your money back. Despite this, some investors like the secure feeling of knowing they can expect a set amount of payments for life. More short-sighted investors mistakenly compare QLACs to investments. Annuities (including QLACs) are not investments. In other words, if you put $135,000 into a QLAC with the plan to start taking the income in eight years, but you die in year seven, your beneficiaries get $135,000—even if the stock market tripled in the same period. Of course, if stocks declined in value, beneficiaries get the same $135,000.
QLACs as the Driving Force for All Types of Annuities
Annuities are structured to provide principal protection and income payments, and they can help plan for longevity, your legacy, and potential long-term care needs. The QLAC product is very pro-consumer for these purposes. The explosion of the mutual fund industry was preceded by a rule allowing mutual funds as an option inside a 401(k). In that same way, QLACs are expected to become the top-selling annuity. They are also likely to evolve into a direct-to-consumer product sold online. Eliminating a high-pressure sales pitch from an agent while providing some retirement income security is a double win for consumers.
