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Qualified Longevity Annuity Contracts (QLACs)

Most people can only guess how long their retirement savings might need to last. Those who withdraw too much or live longer than expected could eventually run out of money; others may withdraw too little and live more frugally than might be necessary.

A qualified longevity annuity contract (QLAC) is a special type of longevity annuity purchased in an IRA or a qualified retirement account such as a 401(k). Lifelong income payments are delayed until the contract owner reaches an advanced age (up to age 85). Because the annuity income is deferred, the payouts are typically higher than they would be if the annuity income was received immediately. Funds used to buy a QLAC are also exempt from required minimum distribution rules that normally apply to tax-deferred plans starting at age 70½.

With a QLAC, retiring workers can use a relatively small portion of their tax-deferred savings to create a larger income stream later in life, a time when they might have little or no ability to work and often face a greater risk of needing long-term care services.

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Better Your Odds

The Employee Benefit Research Institute used a simulation to test the theory that using a portion of a 401(k) plan balance to fund a deferred income annuity at age 65 (with payments delayed until age 85) might help improve retirement savings outcomes. The results suggest that low-wage workers, who depend more on Social Security, may have little need for this type of longevity protection, but higher-income participants (the top 50%) are more likely to benefit. For this group, the probability of running out of money decreases when an annuity is purchased with 5% to 25% of assets.1

Despite federal regulations designed to promote wider adoption of QLACs, less than 2% of defined contribution plans offered them in 2018.2 Consequently, employer plan investors who are considering this retirement strategy might have to roll their retirement plan funds into an IRA before they can buy a QLAC.

Regulations in Play

QLACs are limited to the lesser of $130,000 (adjusted for inflation) or 25% of an individual’s combined qualified retirement account balances. Depending on the plan sponsor or account custodian, a QLAC may be purchased with a lump sum or incrementally. Payments can begin any time after age 70½, but no later than the first day of the month following the participant’s 85th birthday.

The rules also allow for the continuation of income payments throughout the lifetime of a beneficiary (such as a surviving spouse) and/or the return of premiums (minus payouts) as a death benefit. Of course, these options will either cost more up-front or reduce income payments later in life. Without the optional death benefit, insurers will generally keep the premiums paid if the annuity owner dies before (or after) the payout start date.

Cash-out provisions are not allowed in QLACs. Investors should understand that the money invested in the annuity is no longer a liquid asset, and they may sacrifice the opportunity for higher investment returns that might be available in the financial markets. (Nonqualified annuities may offer a cash-out option that permits withdrawals during the deferral phase, but surrender charges typically would apply.)

Like other distributions from tax-deferred retirement plans, payments from QLACs are taxable as ordinary income. With nonqualified annuities purchased outside of a retirement plan, only the earnings portion is taxed.

Annuities are insurance-based contracts that have exclusions, contract limitations, fees, expenses, termination provisions, and terms for keeping them in force. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

 

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Securities offered through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Annuity and insurance products offered through AXA Network, LLC and its subsidiaries.

Retirement Planning Specialist has earned the Retirement Planning Specialist (RPS) title. The Retirement Planning Specialist title is awarded by AXA Advisors, based upon the Financial Professional's (FP) receipt of a Certificate in Retirement Planning from the Wharton School, University of Pennsylvania. In a collaboration between the Wharton School and AXA Advisors' affiliate, AXA Equitable Life Insurance Company (NY, NY), coursework for the certificate was developed exclusively for AXA Advisors FPs, and the title may be used only by FPs who have completed the required coursework and maintain the title through ongoing continuing education requirements. To verify that an FP has earned and holds the title in good standing, contact AXA Equitable atretirement@axa-equitable.com. Complaints about an AXA Advisors FP should be directed to customer.relations@axa-equitable.com.

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