What is a QLAC and how does it help with retirement account RMDs?

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AcadiFi · Accepted Answer

A Qualified Longevity Annuity Contract (QLAC) is a deferred income annuity purchased inside a qualified retirement account (traditional IRA, 401(k)) that receives favorable tax treatment. The premium used to buy the QLAC — up to a statutory limit indexed to inflation (around $200K in 2024 after the SECURE 2.0 increase) — is excluded from the Required Minimum Distribution (RMD) calculation. Payments from the QLAC must begin no later than age 85. Example: a 70-year-old with $1M in a traditional IRA faces RMDs starting at 73 based on the full $1M. By moving $200K into a QLAC with payments starting at 85, RMDs are calculated only on the remaining $800K, reducing forced withdrawals and associated ordinary income tax. The QLAC itself pays out starting at 85, providing longevity insurance. Benefits: (1) tax deferral — less forced distribution in the 70s and early 80s, (2) longevity hedging — guaranteed income past 85 when other assets may be depleted, (3) bequest control — QLAC can include return-of-premium to heirs with reduced payout. Drawbacks: illiquidity, counterparty risk, inflation risk (most QLACs are nominal), opportunity cost if markets perform well. Best candidates: retirees with significant pre-tax accounts, long family life expectancy, manageable current RMD tax burden, and willingness to annuitize. CFA L3 integrates QLACs into the drawdown strategy as a tail-longevity hedge combined with systematic withdrawal from the remaining IRA balance.

What is a QLAC and how does it help with retirement account RMDs?

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