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Annuities

What is a qualified longevity annuity contract (QLAC)?

A woman sits at a computer.
A woman sits at a computer.
AJ_Watt/Getty Images

Creating an income stream that lasts a lifetime can be a challenge. You don't know exactly how long you'll live, nor can you predict how markets will behave. Fortunately, there may be ways to reserve assets for the future while postponing taxes.

A qualified longevity annuity contract (QLAC) is designed to help you set money aside for later in life, when you may need it most.

What is a QLAC?

A QLAC is a deferred annuity designed to provide income in your later years. Most deferred annuities can accomplish that, but QLACs are unique because of the "qualified" aspect. These arrangements allow you to temporarily reduce your required minimum distributions (RMDs) when you follow specific IRS guidelines.

As with many annuities, QLACs can provide lifetime income. Once you convert assets into an income stream, the payments continue for the rest of your life—regardless of how long you live. If you're concerned about longevity, these strategies can help to ensure that you don't run out of money during your lifetime.

When does a deferred annuity qualify as a QLAC?

For a deferred annuity to qualify as a QLAC, it must meet several requirements:

  • The funds must come from pretax retirement accounts such as traditional IRAs or 401(k) plans.
  • The maximum amount you can add to the contract is $145,000 or 25% of your retirement account balances—whichever is less.
  • You must begin taking annuity income from the contract after you turn 85, although you can begin payments earlier.

3 benefits of a QLAC

A QLAC may appeal to risk-averse investors who want to manage taxes and secure an income stream for life. If you have enough retirement income and you don't need all of your assets right away, setting money aside for later could offer advantages. It can help provide lifetime income, avoid market risk and allow you to delay required minimum distributions.

1. Get lifetime income

This strategy can help provide essential long-term income in retirement. When you begin taking annuity income, the insurance company promises to continue paying for the rest of your life. Payments may be able to continue for the remainder of a spouse's life, as well. As a result, you and your loved ones can feel more confident that you won't run out of money.

2. Avoid market risk

If you're concerned about market crashes and investment performance, an annuity can take those worries off your plate. Your income payments don't depend on how the markets perform, and your contract can't lose value due to market crashes while waiting for payments to begin.

3. Delay distributions and manage taxes

This arrangement allows you to delay RMD distributions on a portion of your assets. This allows you to reserve assets for later in your life, which is increasingly important as life expectancies increase. As a hypothetical example, you might take $145,000 of pretax savings and place those funds in a QLAC. In doing so, you would remove that $145,000 from the calculation for your annual RMD, resulting in a smaller required distribution.

With smaller withdrawals from your pretax savings, your taxable income should be lower. That could help you qualify for certain tax benefits or might simply result in a smaller tax bill. However, you will eventually need to begin drawing from those funds—once you reach age 85 at the latest. So, when those delayed RMDs begin, you may have a higher income than you'd otherwise have in your 80s (and beyond).

While Thrivent does not provide specific legal or tax advice, we can partner with you and your tax professional or attorney.

Risks associated with QLACs

A QLAC can help you accomplish specific goals. Still, it's wise to evaluate potential pitfalls.

As a conservative product, a QLAC might not provide as much long-term growth as you could get from investing in financial markets. However, these annuities enable you to avoid the downside risk that comes with investing. Consider your need for liquidity, growth and your appetite for risk as you explore your options.

Choosing a financially strong issuer is also critical when buying a QLAC. The insurance company needs to be in business for several decades, and a failing company could result in financial losses. To reduce the odds of losing money, stick to well-established insurers with high marks from rating agencies.

Be sure to research how your annuity works and what will happen to it after your death. In some cases, payments can stop when you die—leaving nothing for heirs or a surviving spouse. However, you can often choose to include spousal payments or a refund option that pays out any unused funds for your heirs. If you have legacy goals or anybody who depends on you, make sure your loved ones don't lose out.

Annuities are long-term commitments. Once you put money into a longevity contract, you generally cannot change your mind and cash out at any time. The funds get paid out as a lifetime income stream, although your survivors might have the option to take a lump-sum refund after your death.

Comparing QLACs against alternatives

Without a QLAC, you typically need to start taking RMDs after age 72. When that happens, you'll start drawing down your pretax retirement accounts and report that income on your tax return. If you don't need the money yet, you might prefer to delay those withdrawals.

You could just take the RMDs and reinvest the funds in a taxable account, but a QLAC provides a guarantee that standard investment accounts don't offer: an income stream that lasts for your entire life.

An immediate annuity might be another alternative. With that option, you get guaranteed income for life, but you might not need that income if you have other resources available. By starting the income stream earlier in life, your monthly payments could also be smaller than the payments you can get from a QLAC (which allows you to delay payouts until age 85).

The bottom line

If you want to set money aside for your future, a QLAC is an option worth exploring. With one up your sleeve, you can delay RMDs and the taxes that accompany those distributions while setting yourself up for guaranteed lifetime income.

If your goal is to keep your savings intact for as long as possible and ensure income in your later years, a longevity annuity can potentially help. Speak with a Thrivent financial advisor to learn more and discuss the pros and cons.

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