DEAR GARDEN STATE TRUST COMPANY:
WHAT THE HECK IS A QLAC? IS THIS SOMETHING I NEED TO CONSIDER?
A QLAC is a “Qualified Longevity Annuity Contract.” The idea has been in the financial press because the IRS finalized regulations on these instruments in July.
A QLAC resolves two potential problems of retirement financial management. The first is the worry about running out of money during a long life. The second concern is taking required minimum distributions from IRAs and other qualified retirement accounts upon reaching age 70½, having that nest egg diminished by taxation. For example, a retiree at age 65 may feel that she has enough retirement income and resources to last until age 80, when she would like to bump that income up. Given the choice, she’d like to defer IRA distributions until then.
Under the IRS Regulations, if this retiree has a substantial IRA, she could spend up to $125,000 (or 25% of the IRA, if that is less) on a QLAC to begin making payments when she reaches 80. The Regs. provide that payments must begin no later than age 85. When this retiree turns 70½, the amounts spent on the QLAC will not be counted in determining the required minimum distributions from the balance of her IRA.
QLACs must be fixed annuities, not variable or equity-indexed annuities. They may not provide for a cash surrender value or a similar feature. They are permitted to offer a return of premium, should the annuitant die before collecting an amount equal to the premium paid.
The QLAC is a brand new financial product, with which no one has much experience. It may be appropriate in certain circumstances, depending upon the client’s wealth levels and life expectancy. As with all annuities, the longer one lives the more financial benefit one derives.