How Does a QLAC Fit into My Estate Plan?

The average life expectancy for an American has almost doubled since the turn of the 20^th century. While few people would argue that living longer is desirable, particularly if you are in good health, the harsh reality is that living longer also means that your money must last longer. One way to make your money stretch is to use a Qualified Longevity Annuity Contract (QLAC). To further explain, an Indianapolis attorney at Frank & Kraft discusses how a QLAC might fit into your estate plan.

How Is Living Longer a Problem?

Americans enjoy an average life expectancy of 74 for males and 80 for females. Compare those figures to a male’s life expectancy of just 46 years for a man and 48 years for a woman at the turn of the 20^th century, just over 100 years ago. Knowing that you can look forward to not years, but decades of retirement years is certainly something to celebrate, right? Yes, but there is a problem with living longer.

At first glance, the proposition that living longer is a problem may sound preposterous. After all, we humans spend an incredible amount of time and resources trying to discover and develop ways to increase our life expectancy. Living longer, by itself, is not a problem. The problem stems from the need to financially support yourself for every extra year that you live. If you are a woman and you retire at age 65, for instance, and you meet the average life expectancy, you will spend about 15 years enjoying your “Golden Years.” If you exceed the average life expectancy, you could easily spend two, even three decades, enjoying your Golden Years. If you are planning to depend on retirement accounts to support your Golden Years, those accounts were likely set up using the life expectancy tables that were accurate when the account was opened. Consequently, you could easily outlive your retirement funds. This is where a QLAC may be able to help.

Incorporating a QLAC Into Your Estate Plan

If you are facing the odd, but increasingly common, dilemma of potentially outliving your retirement funds, a Qualified Longevity Annuity Contract (QLAC) may be able to help. A QLAC is a type of annuity contract designed precisely for this dilemma. A QLAC is a deferred annuity that is funded by an existing retirement account (401k’s, 403b’s, IRA’s and other tax-qualified accounts) and that can ensure an income stream later in your life.

To create a QLAC, you withdraw a one-time lump sum from an existing retirement account to purchase the QLAC. As a result of the SECURE Act passed in 2022, you can transfer up to $200,000 (adjusted annually for inflation) into a QLAC. The funds withdrawn from your retirement account (up to $200,000) are not taxed if they are used to purchase the QLAC. Taxes only become due when you start making withdrawals from the QLAC.

Most IRAs and other retirement accounts require you to begin taking withdrawals by age 75; however, you can put off mandatory distributions from a QLAC until you reach age 85. Your QLAC withdrawal can, however, help you meet your required minimum distributions for your retirement account.

Finally, as a annuity contract, you are guaranteed a specific income stream once you begin taking withdrawals from your QLAC. As such, incorporating a QLAC into your estate plan helps ensure that you can afford to live longer and enjoy your Golden Years.

Would You Like to Discuss Adding a QLAC to Your Estate Plan?

For more information, please join us for an upcoming FREE seminar. If you are interested in adding a QLAC to you estate plan, contact an experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.

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