A Qualified Longevity Annuity Contract (QLAC), also known as a "longevity contract", is a deferred annuity funded inside a Qualified Plan with the intent of creating retirement income later in life. It is ultimately insurance against outliving your savings. Another way, it is a hedge against longevity. One obvious downside, then, is premature death, as the payout period may not have begun. That said, a major benefit is that, because they are purchased within the Qualified Account, QLACs are exempt from the Required Minimum Distribution (RMDs) that begin to apply at age 70 1/2 or 72 years of age based on the recent changes in the tax code with the SECURE Act.
The QLAC limit for 2020 is $135,000, or 25% of retirement account totals, and that portion can be withheld from RMD calculations as late as 85 years of age. Again, the major trade off is the assumption of longevity versus the tax implications of RMDs. It is a case of tax deferral rather than tax avoidance, and as with any deferred annuity, it takes several years for the annuity payments received to equal the original principal.