All right, my friends. We’re going to dive right into a concept here. There’s a retirement strategy that I think is misunderstood, or maybe just not even known, by a lot of people. It’s called a QLAC, Q-L-A-C. It stands for Qualified Longevity Annuity Contract. It sounds like something that, I don’t know, maybe an actuary would love, but the concept is really pretty simple.
What a QLAC allows you to do is take a portion of money from your traditional IRA, 401(k) or another similar retirement account, and use it to purchase a deferred income annuity. What does that mean? Well, in plain English, you give an insurance company a lump sum today. In exchange, they promise you a stream of income later in life. That stream of income could start at 80 or 82 or 85.
The idea is that the insurance company creates a guaranteed income stream later in retirement, when you may be concerned about living a really, really long time and you want to make sure that your money outlives you rather than vice versa. Sounds like a wonderful problem to have, right? But financially, this creates some challenges. If you retire at 65 and live to 95, that’s 30 years’ worth of retirement, and you want your money to last you through market downturns and inflation and healthcare costs and withdrawals and whatever the heck else life throws at you.
The QLAC is basically designed to help you address that problem. You’re not going to be buying this because you think it’s an amazing investment that’s going to make you rich. You’re buying it because you want another dependable income stream into your 80s and beyond.
Now, what I think really makes this interesting is not the investment vehicle itself, it’s what it can do. When you put money into a QLAC, it would be coming from, remember, an IRA or 401(k) or something like it. That money is not included in the balance used to calculate your required minimum distributions, or RMDs, before the annuity starts paying. So essentially, you’re moving money out of your IRA into the QLAC. Let’s say you did $200,000 of that. That’s removed from the balance, which reduces what you have to take for RMDs during that earlier part of retirement.
Now, I want to be absolutely crystal clear about something. Doing this does not magically wave a wand and make taxes disappear. Eventually the QLAC starts paying that income, and those payments are taxable then. So this is really about deferring income and managing retirement cash flow, more so than avoiding taxes. You can’t entirely avoid them, but you can delay, you can defer.
In 2026, you can put up to $210,000 into QLACs. The old rule limited it to 25% of your account; that’s not the case anymore. Income has to begin no later than age 85, so you can delay it until 85.
Should everyone run out and do this? No. Absolutely not, because there are trade-offs. Number one, my friends: liquidity. When you put money into something like this, it is locked up. So this had better not be the part of your portfolio you want to use for a new roof, or a new car, or a big healthcare bill, or helping out the kids, or an emergency.
That’s why I would never look at this in isolation. We have to ask a few questions. Number one, how much liquid money do you have? Number two, what other income sources do you have? Number three, what does Social Security look like? Number four, do you have a pension? Number five, how much are you withdrawing from your portfolio? And what does your estate plan look like? So many questions to ponder. This matters as we think about income, liquidity and your needs. This may be a good fit for some folks. It may not be for others.
Keep in mind, when you do something with an insurance company, that guarantee is backed by the claims-paying ability of the insurance company. So it had better be a good one and not a bad one, right? You don’t want your money to go poof. This isn’t a decision where I would simply look at who offers the highest income quote. Yes, you want to look at the income, but you also want to look at the company, the contract and the liquidity you’re giving up.
Here’s the kind of person where I think this conversation becomes interesting. Let’s say you’re 65 or 70. You have significant retirement assets. Social Security is covering part of your lifestyle. You don’t have a large pension, but you do have a lot of money in 401(k)s and IRAs. You have good health, and you’re thinking, “What if I live a really long time, into my 90s?”
A QLAC can potentially create an income floor for later in life. You know that when you reach that age, another check is going to start arriving. For some people that is valuable: it’s one more income source that doesn’t depend on what the stock market does down the road. That’s the kind of person I think this could be a good fit for. Basically, it’s another income stream later in life to cover that gap of time.
When we look at stuff like this, a lot of people like to paint it black or white. A QLAC isn’t automatically good or bad. It’s a tool. Like most tools, whether it makes sense really depends on the problem you have.
Remember, if your goal is liquidity, this is probably not the thing for you. If you’re trying to leave the largest amount to your heirs, this is not for you. If you already have a pension and a really nice Social Security income, this probably isn’t for you. But if longevity risk, how long you live, is keeping you awake at night, and you have plenty of other assets and liquidity, a QLAC might be a fit. If you want to reduce your RMDs, it could be worth a look. Just remember the trade-offs: you’re giving up liquidity, and you’re giving up the highest potential rate of return.
So, my friends, the question isn’t “Is a QLAC good?” It’s “Does a QLAC actually solve a problem that exists in my retirement plan?” That, my friends, is the conversation worth having. If you want to have that conversation, I am here for you. It would be my honor and pleasure to help. Reach out, okay? See you.