Florida Elder Law & Estate Planning Blog

QLAC Can Allay Fear About Outliving Your Money

A long life is a gift, especially if you are lucky enough to enjoy good health. But all those years present a challenge, too:  your money must last as long as you do. One strategy that may help you meet that challenge is a Qualified Longevity Annuity Contract (QLAC). Below is a simplified guide to how the QLAC works and its potential benefits. To evaluate if it is a useful strategy for your particular circumstances, speak with your financial advisor. If you need a referral to one, call the Karp Law Firm at 561-625-1100 and we will provide you with several resources in whom we have confidence.

The Basics

Effectively a pension for your advanced years, a Qualified Longevity Annuity Contract is a special type of deferred annuity that is available only using retirement plans: 401k’s, 403b’s, IRA’s and other tax-qualified accounts. The SECURE Act of 2022 increased the amount you may transfer from your retirement account into a QLAC to $200,000. That number will be adjusted annually to keep up with inflation.

Here’s how the QLAC works: You withdraw funds from your existing retirement account and use them for a lump sum, up-front premium to purchase the QLAC. At that point you owe no taxes on the funds you have transferred out of your retirement account. Moreover, the value of the QLAC is excluded when calculating your required minimum distributions. Thus, your required minimum distribution (RMDs) are reduced. There are no annual fees associated with your QLAC.

You choose when to begin receiving payouts from the QLAC, but must begin taking payouts no later than your 85th birthday. The income is guaranteed, and once you commence payouts, you will know precisely how much your monthly payout will be. There is no interest rate risk or stock market risk with a QLAC. Because you can defer payouts until you turn 85, it can be a particularly useful strategy for women, who statistics show are more likely to live into their 90s than their male counterparts.

You will owe taxes on the payouts, of course. The insurance company that provides the distributions from your QLAC will report the taxable income on a 1099-R each year, once withdrawals are made. The QLAC payments continue until death. If you are married, you can opt for a joint lifetime payout, so that the payouts will be made to your spouse after your death. It may also be possible for your beneficiaries to receive a cash refund for any premium not yet paid out upon the annuitant’s death.

Another useful feature: If you ever apply for Medicaid for long-term care, the funds in  your QLAC do not count as an asset. They do count as income, though.

The QLAC can allay your fears about running out of money in your later retirement years. To explore if it is a good choice for you, talk with your financial professional.