QLACs: A Secure Retirement Income Option Enhanced by SECURE Act 2.0

QLACs, or Qualified Longevity Annuity Contracts, are a specialized type of annuity designed to provide guaranteed income in later retirement. These annuities often get overlooked, but recent changes under the SECURE Act 2.0 make them a significantly more attractive option for securing retirement income.

What is a QLAC?

A QLAC is a deferred income annuity purchased with funds from a qualified retirement account like a 401(k) or an IRA. You make a lump-sum investment, and in return, the insurance company guarantees a stream of income beginning at a later age – usually starting no later than age 85. This approach helps protect against the risk of outliving your savings and provides peace of mind with a reliable income stream.

Critical SECURE Act 2.0 Changes for QLACs

The SECURE Act 2.0, passed in late 2022, made significant changes to QLACs:

• Increased Purchase Limit: Previously, you couldn't use more than 25% of your retirement account balance (or $145,000, whichever was less) to purchase a QLAC. The SECURE Act 2.0 removed the percentage limitation and increased the dollar limit to $200,000 (adjusted for inflation). This means you may dedicate a larger portion of your retirement savings to secure a larger guaranteed income stream later in life.
• RMD Exemption: Required Minimum Distributions (RMDs) begin at age 73 (soon to be 75), forcing you to withdraw from your traditional retirement accounts. However, the amount invested in a QLAC is excluded from your RMD calculations until you start receiving payments, giving other investments more time to grow tax-deferred.

Benefits of QLACs in Light of SECURE Act 2.0

• Longevity Insurance: The core benefit of a QLAC is protection against outliving your savings. With guaranteed income in very old age, you have less worry about market downturns or unexpected expenses.
• Reduced RMDs: Exempting your QLAC investment from RMDs may reduce your overall tax burden, as you have smaller required withdrawals from your other retirement accounts.
• Potential for Increased Income: With the higher purchase limit, you may secure a larger guaranteed income stream in your later years.

Considerations Before Buying a QLAC

• Illiquidity: Once you purchase a QLAC, your money is generally inaccessible until payouts begin. Be sure this aligns with your financial flexibility needs.
• Inflation Impact: While a QLAC guarantees your income amount, inflation may erode its purchasing power over time. Some QLACs offer inflation-adjusted options, but those typically start with a lower initial payout.
• Cost and Comparison: It's essential to compare QLAC options from different insurers. Fees and payout amounts may vary significantly.

Who Might Benefit from a QLAC?

QLACs might be a good fit if you:

• Are concerned about outliving your retirement savings.
• Desire a guaranteed income stream to supplement Social Security in later life.
• Want to potentially lower your RMDs in early retirement.
• Have other assets to cover your needs before QLAC payments begin.

The SECURE Act 2.0 makes QLACs far more appealing. If you seek guaranteed income and longevity protection, it's worth discussing QLACs with a trusted financial advisor. Understanding how they work and fit within your broader retirement plan may help you make informed decisions for a more secure future.

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