Turning age 73 is an important milestone if you have a traditional IRA or 401(k). That's when you must begin taking mandatory minimum yearly withdrawals, known as required minimum distributions (RMDs) from these accounts.2 But what if you don’t need that money for current living expenses and would prefer to receive guaranteed lifetime income later in retirement? Fortunately, the US Treasury Department issued a rule creating Qualified Longevity Annuity Contracts (QLACs) in 2014. QLACs allow you to use a portion of your balance in qualified accounts—like a traditional IRA or 401(k)—to purchase a deferred income annuity3 (DIA) and not have that money be subject to RMDs starting at age 73.
What is a QLAC?
A QLAC is a DIA that can be funded only with assets from a traditional IRA4 or an eligible employer-sponsored qualified plan such as a 401(k), 403(b), or governmental 457(b). Prior to the 2014 ruling on QLACs, funding a DIA with qualified funds from an IRA posed a problem: IRAs and other tax-deferred plans such as 401(k)s include RMD rules that require you to begin taking withdrawals when you reach age 73. However now, at the time of purchase, you can select an income start date up to age 85, and the amount you invest in a QLAC is removed from future RMD calculations.
"The creation of the QLAC has opened up the opportunity to defer income past age 73, the RMD starting age, using tax-deferred savings like an IRA or 401(k)," explains Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company.
QLACs address one of the biggest concerns among individuals in retirement: making sure they don't outlive their savings.
A QLAC delivers a guaranteed5 stream of lifetime income beginning on a date you select. For instance, you may purchase a QLAC at age 65 and have your income begin at age 75. Typically, the longer the deferral period, the higher your income will be when you're ready to start receiving payments.
However, there are rules that limit the total amount that can be used to fund a QLAC. Prior to 2023, these rules were complicated, involving both a percentage and total dollar amount limitation. With the recent enactment of the SECURE Act 2.0, the rules were simplified and the maximum lifetime funding amount was increased to $200,000.
QLACs: What are the options for QLACs?
Purchasing an annuity can be complicated, with many kinds to choose from. "Fortunately, QLACs don't add a layer of complexity," says Ewanich. As noted above, the QLAC funding rules have been simplified with the recent passing of SECURE 2.0.
Consider these options:
Single or joint life? If you are married, you can choose a joint contract, which will provide income payments that will continue for as long as one of you is alive. Choosing a joint contract may decrease your income payments—compared with a single life contract—but may also provide needed income for your spouse should you die first.
Compare QLAC options with Fidelity's Guaranteed Income Estimator tool.
When do you want income to start? A QLAC should be part of a broader income plan, to help ensure that your essential expenses like food, health care, and housing are covered during retirement—ideally with lifetime income sources such as Social Security, a pension, or lifetime annuities. Deciding on an income start date will depend on how this income stream will best fit into your overall plan. Here are some hypothetical examples of how someone might choose an income start date:
- A 70-year-old retiree with an existing income stream that will stop at age 75 (for example, proceeds end from the sale of a business, the retiree stops working part time, inheritance income ceases) might start income at age 76 for the QLAC to replace the income that is ending.
- A couple in their late 60s might like to include an income stream that begins at age 80 or 85 as part of their overall plan, to help cover higher anticipated health costs later in retirement.
- A couple at age 65 might be comfortable taking withdrawals from their investment portfolio to cover their expenses at the beginning of their retirement, but they are concerned about the potential need for it to last 30 years or more. They might consider a QLAC that provides lifetime income starting at age 85 to help address these concerns.
Should I consider a QLAC?
Ewanich notes that the decision to purchase a QLAC is a personal one and should take into account your family's needs and financial goals. For instance, you may not want to take RMDs on the entire pretax balance of your IRA if doing so would provide you with more income than you need. But will your financial standing be as strong 20 or even 10 years from now? "A QLAC would allow you to enjoy your earlier retirement years knowing that you have guaranteed income in place when you really might need it," explains Ewanich.
In terms of when to make a decision about purchasing a QLAC, Ewanich suggests weighing the options before reaching age 73: "While the QLAC rule allows you to purchase after age 73, it's a good decision to make when you're initially planning your RMD strategy."