Update: As of January 1, 2022 the QLAC limit increased to $145,000.
Today let’s talk about QLACs, how to use IRA money for lifetime income, how that all sets up, why QLACS are even on the planet, and if it might be a fit for you. It might not be after you take a look at it. Just understand, with QLACs and all annuities, every single time, if it sounds too good to be true, it is. Annuities are contracts. You're transferring the risk to the annuity company to pay you for the rest of your life with a lot of these annuities. There are some principal protection type annuities, but QLACs are pension annuities. It's going to be part of your income floor. The question is, do you need one? We're going to find that out.
Let’s start from the beginning. Annuities were put on the planet in Roman times as a gift to the dutiful Roman soldiers and their families to provide a pension for the rest of their lives. That's where it all came from. Those are single premium immediate annuities. But in essence, a QLAC is the same structure, no fees, no annual fees, no moving parts, no market attachments. It's a straight transfer of risk to the annuity company, and the primary pricing mechanism is your life expectancy when you make the payments.
So QLACs started and were introduced in 2014 by our friends at the IRS and Treasury Department. They sat there with this product called qualified longevity annuity contract because they wanted Americans with IRAs to start using that money for lifetime income guarantee. Social Security was never put on the planet as the primary retirement source, a retirement income source, even though many people, unfortunately, have to depend on that. So with the trillions, and trillions of dollars in individual retirement accounts, traditional IRA type accounts, the government wanted to say, "Hey, could you use some of that for lifetime income? We have this thing called a QLAC."
So what is a QLAC? The rules are you can take the lesser of 25% of your total IRA assets or $135,000, and you can put that $135,000 into a QLAC, and you can start income as soon as say 72 or 73 and defer out as long as age 85. A lot of people think that you have to go to 85. You don't. Why would you buy a qualified longevity annuity contract? Number one, you can add your spouse as a joint lifetime income annuitant, meaning they can get a joint lifetime income stream. And when you die, the income continues uninterrupted and unchanged for the rest of their life.
So using IRA money for lifetime income, QLACs is one way to do it. With QLACs, you can set it up as single life, which means it's just on your life, or you can set it up communal life with a spouse or partner. This means that when your Learjet hits the mountain, the income stream continues uninterrupted and unchanged for your beneficiaries life. The other thing that I need to point out is that you can structure annuity lifetime income streams to precisely what you want to happen.
Most QLACs that I sell have a cash refund provision, meaning that it's going to pay you for the rest of your life. But when you die, whatever money is left goes lump sum cash refund to the list of beneficiaries. So under no circumstance will the evil annuity company keep a penny of the money if we structure its life with a cash refund or communal life with a cash refund.
Remember that all annuities for lifetime income, including qualified longevity annuity contracts, the income stream is primarily based on your life expectancy or life expectancies if joint when you make the payment. Interest rates play a secondary role. Annuity companies have significant buildings for a reason. Because QLACs are a lifetime income product, they base that income stream primarily on your life expectancy, but there remains an interest rate component. Still, it’s a secondary role from a pricing standpoint. Yes, if interest rates were at Jimmy Carter levels, the payments would be higher, but you're not going to beat the insurance company.
Annuity reality is that annuity companies are thinking just like you are; they’re thinking about people waiting to hold and wait on interest rates. Because of this, they price it where if you bought that QLAC today and you deferred it, they're going to reward you and enhance the payout the longer you defer and allow them to hold onto the money. My point is that you shouldn’t look at QLACs as your typical investment stock, bond, mutual fund, ETF. QLACs are contracts. They're not investments. If you want market growth, never buy an annuity. If you want lifetime income, you can only buy an annuity because annuities are the only product on the planet that provides lifetime income.
Therefore, if you’re looking to use IRA money for a lifetime income, QLACs are a great way to do that. You can use single premium immediate annuities inside of an IRA for a lifetime income. You can use income riders inside of an IRA for a lifetime income. But understand that qualified longevity annuity contracts were put on the planet for your traditional IRA so that you can use it for lifetime income and defer out as far as age 85 and get some tax benefits, lessening RMD tax, the requirement of distribution.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.