556 / What is a qualified longevity annuity contract (QLAC)? What steps has the IRS taken to encourage the purchase of QLACs?
Planning Point: Some commentators make a distinction between “longevity annuities” in regard to the annuity starting date (ASD). This is because some contracts specify a particular ASD, such as age 85, while others offer the purchaser a choice of ASDs. The former variety typically provides no pre-ASD death benefit and the latter may.
In the usual case, if a deferred annuity is held in a retirement plan, the value of that contract is included in determining the amount of the account owner’s required minimum distributions (RMDs).2 One of the primary benefits of a QLAC is that the IRS’ rules allow the value of the QLAC to be excluded from the account value for purposes of calculating RMDs.3 Because including the value of a QLAC in determining RMDs could result in the taxpayer being forced to begin annuity payouts earlier than anticipated if the value of his or her other retirement accounts has been depleted, the IRS determined that excluding the value from the RMD calculation furthers the purpose of providing taxpayers with predictable retirement income late in life.4
Under the SECURE Act 2.0, plans may implement a “free-look period” of up to 90 days, during which the taxpayer can rescind the purchase of the QLAC without penalty.
The amount that a taxpayer can invest in a QLAC and exclude from the RMD calculation was limited, however, to the lesser of $145,000 (as adjusted for inflation in 2022, the amounts were $130,000 for 2018-2019 and $135,000 for 2020-2021) or 25 percent of the taxpayer’s retirement account value.5 Beginning in 2023, the limitations for QLAC investments was increased to $210,000 in 2025 ($200,000 in 2023 and 2024) and the 25 percent limitation was removed under the SECURE Act 2.0. The regulations clarify that a taxpayer is not required to exchange an existing QLAC for a new contract to take advantage of the higher dollar limitations. Taxpayers are permitted to add funds to an existing QLAC.