This isn't goodbye.

SECURE 2.0 legislation enacted in December 2022 is great for retired investors. Now more than ever, QLACs are an excellent way for investors to ensure they never run out of money, no matter how long they live! Below we review the evolution of QLACs and the critical elements of the recently passed SECURE 2.0 legislation concerning QLACs.

A QLAC is a fixed, deferred annuity purchased using funds from qualified retirement plans, such as 401(k) plans, 403(b) plans, or individual retirement accounts (IRA). Retirees typically buy QLACs at or before retirement (e.g., age 65). Often they elect to have the guaranteed annuity benefit begin at an advanced age, for example, age 80 or 85, and meeting specific other requirements.

An Internal Revenue Service (IRS) QLAC regulation 26 CFR § 1.401(a)(9)-5 allows retirees to exclude the portion of the retiree’s 401(k) balance used to buy the QLAC from the funds used to calculate the Required Minimum Distributions (RMDs). Retiring participants can choose to begin income payments at a desired start date, which can be as late as age 85.

At the time of the initial IRS regulation, the maximum amount of the QLAC premium was the lesser of 25% of the 401(k) balance, or $125,000. The IRS increased the original QLAC limit of $125,000 to $130,000 effective January 1, 2018, and again on January 1, 2020, to $135,000. Finally, on January 1, 2022, the IRS raised the limit to $145,000.

President Biden signed into law SECURE Act 2.0 on December 29, 2022. The law adds more than 90 new retirement plan provisions, including several affecting QLACs. Secure 2.0 makes QLACs more accessible for Direct Contribution Plan participants, including investors with 401ks and 403b assets. It also positively impacts those with traditional IRAs. Section 202 of Secure 2.0 has eliminated the 25% threshold for QLACs and has increased the dollar limit to $200,000. This limit will be indexed and supplemented from time to time for inflation. The act also clarifies that insurers may make survivor benefits payments in the case of divorce.

We have been there since the beginning helping retirees understand the benefits of QLACs even when other professionals would not. However, the comprehensive nature of SECURE 2.0 changes has required us to take down our original website. QLACguru.com is developing a new site with updated content to reflect the vast changes from SECURE 2.0. In the meantime, here is the link to an authoritative (but readable) summary of the provisions of SEC URE 2.0 from finance.senate.gov.