When most people sit down with a financial advisor to plan for retirement, they hear about 401(k)s, IRAs, annuities, and Social Security optimization. But one option rarely makes the list: the Qualified Longevity Annuity Contract (QLAC). Despite its potential to reduce required minimum distributions (RMDs) and provide guaranteed income later in life, QLACs remain underutilized. Many advisors skip over them—either due to lack of familiarity, commission structures, or a preference for more conventional tools. Yet for certain retirees, this overlooked strategy could be the key to long-term financial security.
What Is a QLAC?
A Qualified Longevity Annuity Contract is a type of deferred income annuity purchased within a traditional retirement account. It allows retirees to set aside a portion of their IRA or 401(k) funds to begin receiving income at a later age—often 75 or 80. The money invested in a QLAC is excluded from RMD calculations until payouts begin, which can significantly reduce taxable income during early retirement years. This delay can help retirees manage taxes, preserve assets, and ensure income later in life when other sources may dwindle.
Why Advisors Often Overlook It
QLACs don’t generate high commissions, and they require a deeper understanding of IRS rules and long-term planning. Many advisors focus on accumulation strategies or products with immediate returns. Others may be hesitant to recommend annuities due to their complexity or past reputation. As a result, QLACs are often left out of retirement conversations—even when they’re a good fit. This omission isn’t always intentional, but it does reflect a bias toward more familiar or profitable options.
Who Benefits Most from a QLAC
Retirees with substantial savings in tax-deferred accounts and a long life expectancy are prime candidates for QLACs. These individuals often face large RMDs that push them into higher tax brackets. By deferring income, they can smooth out their tax liability and avoid penalties. QLACs also appeal to those concerned about outliving their assets, as they provide guaranteed income in later years. For people without pensions or with limited Social Security benefits, this added layer of security can be invaluable.
Tax Advantages That Add Up
One of the biggest draws of QLACs is their ability to reduce taxable income during early retirement. By excluding up to $200,000 (as of current IRS limits) from RMD calculations, retirees can avoid triggering higher Medicare premiums, capital gains taxes, or Social Security taxation. This strategic deferral allows for more control over income streams and better alignment with personal financial goals. It’s a tax-smart move that many overlook simply because it’s not widely discussed.
Flexibility and Customization
QLACs offer more flexibility than many assume. Retirees can choose the start date for income, select joint or single life payouts, and customize features like inflation protection or death benefits. While they do require a commitment of funds, they’re not as rigid as traditional annuities. This adaptability makes them suitable for a range of retirement scenarios, especially when paired with other income sources. The key is understanding how to integrate them into a broader plan.
Potential Drawbacks to Consider
Like any financial product, QLACs aren’t perfect. They tie up funds that could be used elsewhere, and they don’t offer liquidity. If a retiree’s health declines or financial needs change, the money in a QLAC may be inaccessible. Additionally, not all providers offer competitive terms, so shopping around is essential. Still, for those with a clear vision of their retirement timeline and income needs, the benefits often outweigh the limitations.
A Strategy Worth Revisiting
As retirement planning becomes more complex, it’s time to revisit the tools that have been pushed aside. QLACs may not be flashy, but they offer a unique blend of tax efficiency and income security. Financial advisors should consider them more often—and retirees should ask about them directly. In a world where longevity is increasing and market volatility is a constant, guaranteed income later in life is more valuable than ever.
If your advisor hasn’t mentioned QLACs, bring it up at your next meeting—it could reshape your retirement.
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