Deferred income annuities—also called “longevity annuities”—can help solve for some of the risks associated with longevity, such as increased health care costs, by providing a stream of future income that can last a lifetime.
However, MassMutual notes there’s been a catch-22 for owners of qualified plan assets, such as those in a traditional IRA or 401(k) plan, who wanted to use those assets to fund a deferred income annuity. The Internal Revenue Code (IRC) generally requires that distributions from these qualified assets must begin no later than age 70½. Required minimum distribution (RMD) rules make it difficult for owners of qualified plan assets to plan for late-retirement income needs.
In response to the need for greater flexibility for owners of qualified assets, MassMutual has expanded its deferred income annuity product offering by making it available as a qualified longevity annuity contract (QLAC).
A QLAC is a deferred income annuity offered by an insurance company that allows distributions to begin after age 70½. Approved in 2014 by the Internal Revenue Service (IRS) and the U.S. Department of the Treasury, new rules allow owners of qualified plan assets to delay receiving distributions from the assets in a QLAC up until a maximum age of 85; once distributions begin, all standard RMD rules apply.
Research has found that purchasing a QLAC provides a significant increase in retirement readiness for those who live the longest.
Groups have asked the IRS for more clarity about the purchase of QLACs by qualified retirement plan participants because, they note, it is rare for a defined contribution (DC) plan to offer a QLAC option directly.