A Qualified Longevity Annuity Contract (QLAC) is a type of deferred annuity you buy with money from a qualified retirement account (for example, a traditional IRA, 401(k) or 403(b)). The purchaser pays a single premium (lump sum) to an insurance company in exchange for guaranteed periodic income that begins at a specified later age. If the contract meets Internal Revenue Service (IRS) requirements, the QLAC amount is excluded from the retirement-account balance used to compute required minimum distributions (RMDs) until a prescribed maximum deferral age (age 85 under current rules). (Investopedia; GovInfo)
Key takeaways
– QLAC = a deferred annuity funded with a qualified retirement plan or IRA. (Investopedia)
– Money used to buy a QLAC is generally excluded from RMD calculations until the QLAC payout date (no later than age 85). (Investopedia)
– Distributions from a QLAC are taxable as ordinary income when payments begin. (Investopedia)
– SECURE 2.0 changed certain QLAC rules (dollar limits) — check current statutory limits and plan rules before buying. (U.S. Senate Committee on Finance)
What is an annuity (brief)?
An annuity is an insurance contract in which you pay a lump sum or series of premiums and the insurer agrees to pay you income according to terms you select (starting either immediately or at a future date). Annuities can provide lifetime income, period-certain income, joint-and-survivor income, and optional features such as cost-of-living adjustments (COLA).
How QLACs work
– Funding: You transfer a lump-sum amount from a qualified account (IRA, 401(k), etc.) to an insurer to buy the QLAC.
– Deferral: The QLAC delays distributions for RMD purposes until your chosen payout start date (but no later than age 85).
– Payout: On the chosen start date, the insurer begins making periodic payments (monthly, quarterly, etc.) for the contract term (often lifetime). Payments are generally taxable as ordinary income.
– Options: You can typically choose single-life or joint-and-survivor payouts, optional cost-of-living increases, and limited death-benefit or period-certain features.
IRS limits and rules (what to check)
– Maximum deferral age: QLAC distributions must begin by age 85. (Investopedia)
– Purchase limits: Historically QLACs were subject to both a percentage-of-account and a dollar cap. SECURE 2.0 adjusted QLAC rules (see legislative summary); confirm the current dollar limit and percentage cap before purchasing and confirm whether your plan permits QLACs. (U.S. Senate Committee on Finance)
– RMD treatment: If the QLAC satisfies IRS requirements, the contract amount is excluded from the account value used to calculate RMDs until the QLAC’s payout date. (Investopedia; GovInfo)
Taxes
– Deferred taxation: Money used to buy a QLAC comes from pre-tax retirement dollars and is not taxed at purchase.
– Taxation of payments: Once payments begin, distributions are taxed as ordinary income in the year received.
– Effect on RMDs: Removing QLAC funds from the RMD calculation can lower RMD amounts and current taxable income until the QLAC pays out. (Investopedia)
QLAC options and features
– Start-date flexibility: You select when payouts begin (subject to the maximum deferral age).
– Joint annuitant: You can name a spouse or other joint annuitant so payments continue upon the first death (with typical survivor-percentage options).
– Cost-of-living adjustment (COLA): Adds inflation indexing to payouts; increases initial payouts’ price and reduces initial payment size.
– Laddering: Buying multiple QLACs with staggered start dates to smooth costs and payout timing (similar to dollar-cost averaging). (Investopedia)
– Period-certain/death benefits: Some contracts offer a guaranteed minimum payout period or limited death benefit; this may reduce the income amount.
– Portability and surrender: Many QLACs are highly illiquid once purchased—check transferability and surrender/withdrawal rights.
Benefits
– Reduces RMD-driven taxable income now by excluding the QLAC purchase amount from RMD calculations until payouts begin.
– Provides protected, guaranteed lifetime income later in life, helping mitigate longevity risk.
– Can be structured to provide survivor protection.
Drawbacks / Risks
– Illiquidity: Money used to buy a QLAC is generally inaccessible until payouts begin.
– Insurer credit risk: Benefit depends on the issuing company’s financial strength.
– Inflation risk: Without COLA, fixed payments lose purchasing power over time.
– Opportunity cost: Funds locked into a QLAC may miss higher investment returns elsewhere.
– Complexity and inflexibility: QLACs are less flexible than other retirement strategies and are not appropriate for everyone. (Investopedia)
Example (practical illustration)
Shahana, age 67, expects a first-year RMD of $84,000 at age 73 based on current account balances. She wants to reduce RMD-driven taxable income because she has other income sources and plans to keep working part time. She buys a single-premium QLAC for $100,000 from her IRA and chooses payouts beginning at age 85. The $100,000 is excluded from the IRA account value used to calculate RMDs until age 85, lowering her annual RMDs in the interim. When she turns 85, QLAC payments begin and are taxed as ordinary income in the years received. (Adapted from Investopedia example)
What is the cost of a QLAC?
– Purchase price: A single premium paid to the insurer.
– Implicit costs: Insurers price annuities to reflect mortality, interest rates and profit margins—these reduce the payout you receive versus hypothetical investment returns. There may not be an explicit “sales fee,” but the payout rates embed costs.
– Optional riders (COLA, survivor options, period certain) typically reduce initial payout amounts.
– Shop for quotes: Payout rates and features vary by insurer; compare multiple providers and evaluate issuer credit ratings.
When do I pay taxes on a QLAC?
– You pay ordinary income tax on the annuity payments when you receive them. The funds used to buy the QLAC were pre-tax retirement dollars (unless you used Roth assets), so taxation is deferred until distribution. (Investopedia)
Limitation of purchasing a QLAC
– Dollar and percentage purchase limits apply (check current statutory limit and plan rules). Not all retirement plans permit QLAC purchases — an IRA usually will, but some employer plans may not. Once purchased, funds are typically not available for other needs. (Investopedia; U.S. Senate Committee on Finance)
Warning / main risk
The primary risk is the financial strength and claims-paying ability of the issuing insurer. If the company becomes financially weak, promised payments could be reduced or delayed (state guaranty associations provide limited protection). Also ensure buying a QLAC won’t leave you short of accessible savings for emergencies. (Investopedia)
Practical steps to evaluate and buy a QLAC
1. Verify plan eligibility
• Confirm whether your IRA or employer plan permits QLAC purchases and whether plan-specific rules apply.
2. Check current legal limits and tax rules
• Confirm the current dollar limit and any percentage cap for QLAC purchases (SECURE 2.0 changed QLAC rules—review current guidance). Also confirm the maximum deferral age for RMD purposes (age 85 under current IRS guidance). (U.S. Senate Committee on Finance; GovInfo)
3. Estimate RMD impact
• Calculate your projected RMDs with and without a QLAC to quantify tax savings. The QLAC amount is excluded from the balance used to compute RMDs until the payout date.
4. Decide payout timing and features
• Choose the annuity start date (when payments begin) and whether you want joint-survivor coverage, COLA, period-certain guarantees, or a death benefit. Understand the trade-off: more protections reduce initial income.
5. Shop insurers and get multiple quotes
• Compare payout rates for your chosen start age and options across reputable insurers. Look at insurer credit ratings (A.M. Best, S&P, Moody’s) and read contract terms carefully.
6. Consider laddering
• If concerned about interest-rate timing or want staggered income, consider buying several QLACs with different start dates across years.
7. Preserve liquidity and emergency funds
• Don’t use all your liquid savings for a QLAC—keep an emergency fund and liquid assets for near-term needs.
8. Execute the purchase
• Work with your plan administrator or IRA custodian and the chosen insurer to transfer funds and establish the contract. Confirm how the purchase will be reported for RMD calculation purposes.
9. Monitor and document
• Keep contract documents and confirm how the QLAC is treated for RMD calculations each year. Review the insurer’s financial strength periodically.
Questions to ask a seller
– Is my plan/IRA eligible for this QLAC?
– What is the current QLAC dollar limit and percentage cap that applies to my situation?
– What payout rates do you offer for my desired start age and options?
– Are there surviving-spouse or joint-annuitant options and their payout factors?
– Is COLA available? How is it priced?
– Are there death benefits or period-certain guarantees? At what cost?
– What happens if the insurer becomes insolvent? What protections exist?
– Can I transfer or surrender the contract later?
Bottom line
A QLAC can be a useful tool for reducing RMD-driven taxable income today while guaranteeing lifetime income later in life. It’s most helpful for people who don’t need the funds before the payout date and who want to hedge longevity risk. However, QLACs are illiquid and depend on the insurer’s solvency; they can also reduce estate liquidity and offer limited inflation protection unless you buy a COLA rider. Before purchasing, confirm current statutory limits, check plan rules, compare multiple insurers, and run the numbers to see if a QLAC fits your broader retirement cash-flow and tax plan. (Investopedia; GovInfo; U.S. Senate Committee on Finance)
Sources and further reading
– Investopedia — Qualified Longevity Annuity Contract (QLAC) (summary and examples)
– GovInfo — “Longevity Annuity Contracts” (federal guidance)
– U.S. Senate Committee on Finance — “SECURE 2.0 Act of 2022 Summary” (changes to retirement-law provisions relevant to QLACs)
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.