A qualified longevity annuity contract (QLAC) is a deferred income annuity bought inside an IRA or 401(k) that can delay income to as late as age 85. The amount used to buy it is excluded from required minimum distribution calculations up to an IRS-set dollar limit, so it can lower your RMDs and the tax on them. It is longevity insurance: guaranteed income that starts late, subject to the issuing insurer's claims-paying ability.
Is this a fit for you?
Who This Is For
- You are worried about outliving your assets late in life
- You want to reduce your RMDs and the tax on them
- You have qualified money you will not need until your 80s
- You want guaranteed income that begins late in retirement
- You want to hedge longevity without insuring all of your assets
Who This Is Not For
- You will need that money or its income before the start date
- Leaving the full amount to heirs is your priority (return-of-premium options reduce income)
- You are in poor health or expect a short horizon
- You want liquidity and access
- You have no qualified (pre-tax) money to use
How do the options compare?
| Feature | QLAC | Regular DIA | Leave in IRA |
|---|---|---|---|
| Counts toward RMDs | Excluded up to the IRS dollar limit | Counts toward RMDs | Counts toward RMDs |
| Latest income start age | No later than age 85 | Set by the contract, no RMD relief | N/A (RMDs begin at the required age) |
| Tax treatment | Ordinary income when payments begin | Ordinary income when payments begin | Ordinary income as withdrawn |
| Access to principal | Generally none once purchased | Generally none once purchased | Fully accessible |
| Longevity protection | Strong: guaranteed income starts late | Depends on the chosen start date | None: you bear longevity risk |
What are the risks, costs, and alternatives?
A QLAC is generally irrevocable and illiquid once purchased
Once you buy a QLAC, the money is committed. There is generally no cash surrender value and no way to reverse the purchase. Only commit funds you are certain you will not need before the income start date.
The amount you can use is capped by the IRS dollar limit
The IRS sets a maximum dollar amount of qualified money you can use to buy a QLAC, and that limit is adjusted periodically. Because it changes, verify the current figure before you size a purchase rather than relying on a prior year's number.
Income is deferred, so there is no access during the deferral years
By design, a QLAC pays nothing until the start date you choose. During the deferral years there is no income and no access to the principal. That trade is what buys the higher guaranteed payment later.
The income depends on the carrier
The income is subject to the carrier's claims-paying ability and is not FDIC insured. A QLAC is not a bank product. The financial strength of the issuing insurance company is what stands behind the promised payments.
What does this look like in practice?
A 72-Year-Old Using a QLAC to Lower RMDs and Insure Against a Long Life
Illustrative example: not an actual client.
Consider a 72-year-old with a large traditional IRA who is already subject to required minimum distributions. A meaningful share of each year's RMD is income they do not currently need, and it pushes up their taxable income. They also worry, given family history, about still being alive and needing income in their late 80s and 90s.
They use a portion of the IRA to buy a QLAC, keeping the purchase within the IRS dollar limit that is adjusted periodically. The amount used to buy the contract is excluded from RMD calculations up to that limit, which lowers their current RMDs and the tax on them. They set the income to begin at age 85, the latest start age a QLAC allows.
If they live into their late 80s and 90s, the QLAC pays guaranteed income for the rest of their life, subject to the issuing insurer's claims-paying ability, exactly when other assets may be running low. The tradeoff is that the money used is committed: it is illiquid during the deferral years, and if they die before or soon after payments begin, the benefit to heirs depends on the options chosen at purchase.
Illustrative scenario for educational purposes. It is not tax advice and is not a promise of any particular result. QLAC rules, IRS limits, and carrier terms change; verify the current dollar limit and consult your tax advisor.
Common Questions
How does a QLAC lower my required minimum distributions?
The qualified money you use to buy a QLAC is excluded from required minimum distribution calculations, up to an IRS-set dollar limit. Removing that amount from the calculation lowers your current RMDs and the tax on them. The limit is adjusted periodically, so verify the current figure before you size a purchase.
When can QLAC income start?
You choose the start date, which can be deferred to as late as age 85. During the deferral years the contract pays nothing and you cannot access the principal; that trade is what buys the higher payment later. QLAC income is subject to the claims-paying ability of the issuing insurance company.
Can I get my money back from a QLAC if I need it?
Generally no. A QLAC is typically irrevocable and illiquid once purchased, with no cash surrender value and no way to reverse the purchase. Only commit funds you are confident you will not need before payments begin, since the money is locked in during the deferral years.
What happens to a QLAC if I die early?
If you die before or soon after payments begin, what your heirs receive depends on the options you chose at purchase, such as a return-of-premium feature, which reduces the income. A QLAC is longevity insurance, so passing the full amount to heirs is not its purpose. Payments are subject to the claims-paying ability of the issuing insurance company.
Related Questions
Want to Lower RMDs and Insure Against a Long Life?
We help you size a QLAC within the current IRS dollar limit and coordinate it with your RMD strategy, so the amount you commit lowers your required distributions today and provides guaranteed income if you live well into your 80s and 90s.
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