Updated Rules

For millions of Americans, outliving their retirement fund is a serious concern. After two years of record-high inflation, this may be truer now than ever. Since most nest eggs are tied to the stock market, it might not take more than a relatively minor market downturn to drastically reduce the size of a retirement fund.

For Americans facing these worries, a Qualified Longevity Annuity Contract, or QLAC, could provide some peace of mind.

According to new rules set by Congress, Americans can now use up to $200,000 of their retirement accounts to purchase QLACs — a significant increase from previous levels.

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What’s a QLAC?

A QLAC is a type of fixed income tool. To take advantage, one would buy an annuity near the start of retirement using funds from a IRA or 401(k). In exchange, the insurer agrees to pay a set annual amount for life, starting at some predetermined point in the future.

Those who purchase these policies can expect to receive steady payments throughout retirement. QLAC payments only stop once the account holder has passed away. It’s also possible to include a death benefit provision, which allows the account holder’s family to recoup the purchase price of the annuity, minus all payments.

With a QLAC, individuals also stand to save on the tax payments they’d otherwise have to make on retirement distributions. For example, if you have $1 million in your nest egg and contribute to a QLAC at the new maximum, your required minimum distributions — and accompanying taxes — would be based on only the remaining $800,000 balance.

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Pros & Cons

One of the biggest benefits to buying a QLAC is that they offer significantly more lifetime income than most other annuities and can help create consistent income during your later years. With this in mind, they can be a safer bet for those who don’t plan on needing full access to retirement funds until later in life.

However, buying a QLAC could also limit your income potential. As they are a fixed-income tool, there is less potential upside than an IRA or 401(k). On the flip side, the guaranteed income stream could free up more flexibility to invest in other assets.

When considering a QLAC, the question essentially comes down to this: would you rather transfer market risk to an insurer, or shoulder it yourself? As always, the choice is yours.

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

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Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and here. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available here

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