The untapped potential of Qualified Longevity Annuity Contracts

By Brad Pistole

Annuities are a strong choice for clients looking to drive guaranteed income, providing different options for unique client situations. Each type of annuity has a specific goal, so if a client purchases the wrong type of annuity, it can leave lasting impacts on their financial futures.

Qualified Longevity Annuity Contracts (QLACs) are fundamentally different from most fixed income annuities. QLACs are not common, so it’s less likely for advisors to recommend them to clients in comparison to other fixed income options.

Advisors who carve out time to understand QLACs and their purpose can help provide more informed, well-rounded recommendations to their clients.

Defining the difference

Generally, most fixed income annuities are for clients of all ages, serving several purposes, such as income growth or deferred income, but the stipulations for QLACs are much more specific. A QLAC exists in its own world – they’re designed for clients who have 401(k), IRA, 403(b) or governmental 457(b) accounts, and they don’t want to take potentially all or a portion of their required minimum distribution (RMD) at age 73 or 75.

Once a deposit into a QLAC has been made, it’s important to inform clients that there is no surrender cash value, like there would be with a standard variable annuity, so they have to be sure they will not need to access that income after the deposit has been made.

For example, let’s say a client who is 73 years old has $500,000 in an IRA, but they do not need the income and want to avoid paying taxes on it. Since their RMD would be based on that $500k in the IRA, the client can move up to $210,000 from out of their IRA account and into a QLAC to avoid taking an RMD on those dollars.

This would not affect the client's RMD until age 85 (when the QLAC dollars are required to be included in the RMD), sheltering those tax deferred dollars for an additional 12 years. A QLAC would be a well-suited product for this client, as it provides them with an opportunity to continue deferring those taxes well into the future.

The ideal QLAC client

Similar to most annuities, QLACs are not a product to offer to all clients with tax-deferred accounts. The market for QLACs is more targeted, so advisors should view QLACs as a tool specifically designed to provide clients with a tax break for much longer than a typical annuity.

The goal of a QLAC is not to make as much income as possible, like the goal of pairing a fixed income annuity (FIA) with an income rider, which is likely why it’s far less popular than most FIAs. The main objective of a QLAC is to provide clients with a tax break (due to delayed RMDs on the QLAC dollars) for as long as possible.

Let’s say a 72-year-old client purchased a FIA one year ago, the first anniversary date is coming up, and they have more than $1,000,000 in an IRA account. Since they’re approaching RMD age, they’ll have to take an RMD of roughly $38,000 from that IRA ($1,000,000/26.5).

Had the client been educated on all their annuity options, they could have repositioned up to $210,000 of that IRA balance into a QLAC, rather than purchasing an FIA, so they would not have to take such a large RMD until age 85. By moving $210,000 into a QLAC, the balance in the IRA used to calculate the RMD would be reduced to $790,000, thereby reducing the first RMD from nearly $38,000 to just under $30,000 ($790,000/26.5).

The specific purpose of a QLAC underscores the need for advisors to be super attentive during discovery meetings. Identifying what the client’s current situation is in comparison to their goals can help advisors exceed client expectations.

The benefits of a QLAC rely on the client’s finances, so it’s important for advisors not to recommend them to clients who may need the income from their tax-deferred accounts.

Promoting education around QLACs and their capabilities, both from the advisor and the client perspectives, will help advisors provide more holistic recommendations, securing more long-term relationships.

About the MDRT member
As the president of the Ozarks Retirement Group, Brad Pistole has structured more than 2,000 annuities over the past 17 years. In the process of serving clients, he’s become an expert on income and bucket planning — helping clients set up different buckets of money to strategically outpace inflation while maintaining income security. Pistole is also a nationally recognized Ed Slott Master Elite IRA Advisor and educator, and he widely shares that expertise as the long-standing host of Safe Money Radio. Pistole is a 16-year MDRT member with 12 Top of the Table qualifications.