If you’re considering a Qualified Longevity Annuity Contract (QLAC) as part of your retirement planning, you’re likely seeking a reliable income strategy for later years. While QLACs offer unique advantages, they also have limitations. It’s important to understand both sides before deciding whether a QLAC is right for you. In this blog, we’ll explore what QLACs are, the latest updates for 2025, their benefits, their drawbacks, and how to structure them effectively.
What is a QLAC and Why Should You Care?
A Qualified Longevity Annuity Contract (QLAC) is a specific type of deferred annuity designed to provide income later in retirement. Funded through traditional retirement accounts like an IRA, 401(k), or 403(b), a QLAC allows you to set up a steady income stream starting at a future age of your choosing—anywhere up until age 85, which is the IRS deadline.
Introduced in 2014 through a collaboration between the IRS and the U.S. Treasury, QLACs offer a unique advantage: they allow you to defer part of your retirement income without counting toward your required minimum distributions (RMDs). This can be particularly useful for managing the “income floor,” which refers to the minimum amount of guaranteed income you’ll need throughout retirement.
Key Updates for 2025
Thanks to the SECURE Act 2.0 and IRS revisions, some important rules governing QLACs have changed for 2025. These changes offer greater flexibility and opportunity for those planning their retirement income:
- Higher Contribution Limits: You can now contribute up to $210,000 to a QLAC, adjusted for inflation each year. This is a significant increase over the previous rule, which allowed only 25% of an IRA balance to be allocated to a QLAC.
- Deferral Flexibility: While income must begin by age 85, you can select a start date any time before then, giving you more control over when your payments begin.
- RMD Exclusion: QLAC funds are excluded from the calculation of RMDs, which can help lower your taxable income each year.
- Plan Flexibility: Funds designated for a QLAC must come from pre-tax retirement accounts (like IRAs or 401(k)s) and must be used exclusively for the annuity—no other types of funds qualify.
Advantages of a QLAC
There are several reasons why a QLAC might be an attractive choice for certain retirees:
- Guaranteed Income for Life: A QLAC acts like a personal pension, offering guaranteed income that continues as long as you or your spouse are alive.
- Tax-Advantageous RMD Strategy: Since QLAC funds are excluded from RMD calculations, you could lower your taxable IRA balance for several years.
- Simple Setup: Compared to other complex financial products, QLACs are relatively easy to set up and understand.
- Estate Planning Benefits: Some QLAC options include a “cash refund” feature, allowing remaining funds to be passed on to your heirs.
- Flexible Start Dates: You can choose to begin payments as early as age 70 or 71, or defer them until you reach 85.
- Laddering Opportunities: You can “ladder” QLACs by setting up multiple contracts with staggered income start dates, giving you flexibility in your retirement income planning.
Disadvantages of a QLAC
Despite their benefits, QLACs are not without their drawbacks:
- No Market Growth: During the deferral period, your principal doesn’t earn interest. The only way your payments can increase is by deferring income for a longer period.
- Low Liquidity: Once you’ve purchased a QLAC, the funds are locked in. You won’t be able to make lump-sum withdrawals or access the money if you need it.
- Contribution Limits: While the contribution cap has been raised, $210,000 may still fall short for those with larger IRAs or 401(k) balances.
- Fixed Payment Rates: Once you purchase a QLAC, the payment rate is set and will not change, even if interest rates rise or market conditions improve.
When to Consider a QLAC
QLACs are particularly useful if you want to secure guaranteed income in your later years, especially if you’re planning for legacy goals or ensuring your spouse will be provided for after you’re gone. They may not be the best fit if you need access to your funds before income starts, or if you’re primarily focused on growing your investments.
How to Shop for a QLAC
When shopping for a QLAC, it’s essential to compare offers from different insurance carriers, as payout rates can vary. Just like airline tickets or grocery prices, annuity rates fluctuate frequently. The “best” company for you is the one that offers the highest contractual income for your specific needs at the time you purchase.
By understanding the pros, cons, and updates to QLACs in 2025, you can make an informed decision about how to incorporate them into your overall retirement strategy.
