Estimate the impact of a QLAC on your Required Minimum Distributions (RMDs).
Understanding Qualified Longevity Annuity Contracts (QLACs) and RMDs
A Qualified Longevity Annuity Contract (QLAC) is a type of annuity that can be purchased within a qualified retirement plan, such as a 401(k) or IRA. The primary purpose of a QLAC is to provide a stream of income later in life, specifically to mitigate the risk of outliving one's retirement savings. A key benefit of QLACs is their impact on Required Minimum Distributions (RMDs).
How QLACs Affect RMDs
Starting at age 73 (as of the SECURE 2.0 Act), individuals must take RMDs from most retirement accounts. These distributions are taxable income. However, the amount paid for a QLAC can be excluded from the calculation of your account balance used to determine your RMD. This exclusion continues for the life of the contract.
There are specific limits on QLACs:
The cost of the QLAC cannot exceed $200,000 (indexed for inflation) per person.
The QLAC cannot account for more than 25% of the retirement account balance from which it is purchased.
The QLAC must begin payments no later than age 85.
The Calculation Logic
The calculator estimates the reduction in your RMD by determining the portion of your retirement assets that will be allocated to the QLAC. The core idea is to find the remaining balance that will still be subject to RMD calculations.
The calculation performed is as follows:
Validate Inputs: Ensure all provided numbers are valid and fall within typical ranges.
Check QLAC Cost Limit: The cost of the QLAC should not exceed $200,000 (though this calculator uses the user-provided cost, it's important to be aware of the limit).
Check QLAC Percentage Limit: The QLAC purchase cost should not exceed 25% of the total retirement account balance. If it does, the user has likely exceeded the QLAC limit, and the calculation might not reflect regulatory compliance.
Calculate Remaining Balance for RMD: The amount remaining in the retirement account that is *still subject* to RMD calculation is the 'Total Retirement Account Balance' minus the 'QLAC Purchase Cost'.
Determine RMD Reduction: The reduction in the balance used for RMD calculation is effectively the 'QLAC Purchase Cost', up to the regulatory limits.
Simplified Outcome: This calculator highlights the amount of your retirement savings that is *no longer considered* for RMD calculation purposes due to the QLAC purchase. It helps visualize how much more you *could* have in your account balance if you *didn't* purchase the QLAC, which would lead to a higher RMD.
Example Scenario
Suppose you have a total retirement account balance of $1,000,000 at age 70, and you decide to purchase a QLAC for $150,000. Your estimated life expectancy is 90.
Total Retirement Account Balance: $1,000,000
QLAC Purchase Cost: $150,000
Current Age: 70
Estimated Life Expectancy: 90
In this case, the $150,000 used to purchase the QLAC is excluded from your account balance when calculating your RMD. This means your RMD will be calculated based on a balance of $1,000,000 – $150,000 = $850,000, rather than the full $1,000,000. This can significantly lower your taxable income in the years leading up to the QLAC payout, and potentially reduce estate tax implications.
Disclaimer
This calculator provides an estimate for educational purposes only. It does not constitute financial advice. Consult with a qualified financial advisor or tax professional to discuss your specific situation and the suitability of QLACs for your retirement plan.
function calculateQLAC() {
var accountBalance = parseFloat(document.getElementById("accountBalance").value);
var qlacCost = parseFloat(document.getElementById("qlacCost").value);
var currentAge = parseInt(document.getElementById("currentAge").value);
var lifeExpectancy = parseInt(document.getElementById("lifeExpectancy").value);
var resultDiv = document.getElementById("result");
if (isNaN(accountBalance) || isNaN(qlacCost) || isNaN(currentAge) || isNaN(lifeExpectancy)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (qlacCost < 0 || accountBalance <= 0 || currentAge <= 0 || lifeExpectancy accountBalance * maxQlacPercentage) {
resultDiv.innerHTML = "QLAC Cost exceeds 25% of Account Balance. Your RMD balance is effectively: $" + effectiveRmdBalance.toLocaleString(undefined, { maximumFractionDigits: 0 }) + " (Note: This purchase may exceed regulatory limits).";
} else if (qlacCost > maxQlacCostAllowed) {
resultDiv.innerHTML = "QLAC Cost exceeds the $200,000 limit. Your RMD balance is effectively: $" + effectiveRmdBalance.toLocaleString(undefined, { maximumFractionDigits: 0 }) + " (Note: This purchase may exceed regulatory limits).";
}
else if (effectiveRmdBalance < 0) {
resultDiv.innerHTML = "QLAC Cost cannot be greater than the Account Balance. Your RMD balance is effectively: $0";
}
else {
resultDiv.innerHTML = "Your RMD balance is effectively: $" + effectiveRmdBalance.toLocaleString(undefined, { maximumFractionDigits: 0 });
}
}