Qualified longevity annuity: Income protection for a long life

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As life expectancies increase, longevity risk — the risk of outliving retirement savings — is a concern for a growing number of people. In response, recent federal regulations created qualified longevity annuity contracts (QLACs), accessible through employer-sponsored plans, such as 401(k)s and IRAs.

What is QLAC?
A QLAC is a type of longevity annuity that is held in an employer-sponsored plan. The premium paid to a QLAC is held for a number of years until distributions begin later in life. There are specific requirements and restrictions on QLACs:

  • The QLAC must generally be payable over the retiree’s lifetime or over the lifetimes of the retiree and a beneficiary, and the interval between payments can be no longer than one year
  • The QLAC must provide that payments begin no later than the first day of the month following the participant’s 85th birthday, although an earlier starting age may be selected
  • No more than 25% of any individual plan account balance may be allocated to a QLAC (including the value of the QLAC), and the value of the retiree’s IRAs are treated as a single plan for purposes of applying the percentage limit
  • The total amount of all QLAC premiums paid by all retirement plans and IRAs over the participant’s lifetime may not exceed $125,000, adjusted for cost-of-living increases, although inadvertent overfunding can be remedied if done in a timely manner
  • QLACs may not include “cash out” or surrender provisions, and may not be a variable annuity or an indexed annuity. Nor can a QLAC be held in a defined benefit (pension) plan, Roth IRA, or Roth 401(k)

Potential benefits

  • QLAC balances during deferral are not included in calculating required minimum distribution (RMD)s, reducing the amount of required distributions and the income tax bite associated with those distributions
  • The amount and starting date of future QLAC distributions is predetermined, allowing a retiree to more accurately calculate how long income from retirement savings may need to last
  • A QLAC may provide cost-of-living adjustments to potentially increase the income stream
  • A QLAC death benefit may include a return of premium

Potential drawbacks

  • QLACs are not liquid, have no cash surrender value, are generally irrevocable, and are not subject to growth potential during deferral years
  • Retirement plan sponsors may not allow for the purchase of a QLAC within their plan
  • Funding a QLAC with a portion of a retirement account reduces the account balance available to provide income during the years before the QLAC distributions begin
  • No payment will be made to a QLAC beneficiary if the annuitant dies before the payment start date, unless the contract owner has purchased an optional death benefit
 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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