A Qualified Longevity Annuity Contract (QLAC) is a new type of deferred income annuity (DIA) that meets the specifications outlined in the Treasury regulations issued last year. As you know, annuities are issued by insurance companies, and while 16 companies currently issue DIAs, only nine issue QLACs, although that number is sure to increase as these products gain publicity and acceptance.
A DIA allows a purchaser to pay a premium now and receive known, guaranteed (by the insurance company, not the federal government) lifetime payments starting at a predetermined date in the future.
The primary limitation is that DIAs are not suitable for qualified accounts (IRAs, 401(k)s, etc.) because of the required minimum distributions (RMDs) that must commence from those accounts beginning at age 70½. The new regs solve that problem by exempting QLACs from the RMD calculations. As a result, QLACs can only be purchased by qualified accounts.
Exempting the value of the QLAC from the RMD calculation is one of the major benefits of QLACs, as it allows a tax that would otherwise be due and payable to be further deferred. The final regulations spell out the specifications that DIAs must meet to be treated as QLACs. Two of the major limitations are 1) the amount that can be allocated to them is limited to the lesser of $125,000 or 25% of the account value, and 2) the maximum deferral age is 85.
To my way of thinking, QLACs are ideal for that small group of individuals who have accumulated a fair amount of qualified money, don’t have a current need for the income from it, and are between the ages of 60 and 75.
As an example, a 70 year old with a half million in her IRA is allowed to allocate the maximum $125,000 (25% of $500k) to a QLAC. That would exempt $4,562 from taxation (the RMD on $125k) that year. Deferring all the RMDs to age 85, while not required, would result in a cumulative deferral of $99,236.
While the regs limit the maximum deferral to age 85 (they do allow that to be increased to reflect changes in longevity), most QLACs allow for a one-time adjustment of five years either way. So if a 70 year old purchaser were to select age 80 as the income starting point, he could accelerate it to age 75 or defer it to age 85, or any time in between.
In conclusion, this is a niche product that will only appeal to a small segment of the population. But for those who fit the profile, it represents an opportunity to defer taxes even further. If you would like additional information on this topic, please call or email.