QLACs (Qualified Longevity Annuity Contracts): Shield Your IRA from RMDs While Guaranteeing Late-Retirement Income

What Is a QLAC and Why Does It Exist?

Here's a problem that quietly frustrates a lot of retirees: decades of disciplined IRA saving, no current need for most of the balance, and yet the IRS still requires withdrawals to begin. Those required minimum distributions — RMDs — start at age 73 (rising to 75 in 2033), and they force a growing percentage of the IRA out every year, whether the income is needed or not. The government waited 40 years for its tax revenue, and patience has run out.

Each withdrawal is taxed as ordinary income. If the money isn't actually needed for living expenses, those forced distributions can push retirees into a higher tax bracket to solve a problem they didn't have.

Enter the QLAC — the Qualified Longevity Annuity Contract.

A QLAC is a specific type of deferred income annuity that the IRS has blessed with a special feature: the money invested in a QLAC is excluded from RMD calculations. It's one of the very few legal ways to reduce required minimum distributions.

Another way to think about it: a QLAC takes a slice of an IRA and converts it into a guaranteed future pension. In the meantime, the IRS can't force withdrawals from that slice.

It's longevity insurance purchased with retirement-account money, wrapped in a tax-friendly package that Congress specifically designed for this purpose.

How QLACs Work: Step by Step

Step 1: Purchase with Qualified Money

QLACs can only be purchased with money from qualified retirement accounts — Traditional IRAs, 401(k)s, 403(b)s, and certain governmental 457(b) plans. The maximum investment is $200,000 across all qualified accounts combined.

That $200,000 limit was simplified by the SECURE 2.0 Act, which eliminated the old rule that also capped QLAC purchases at 25% of the account balance. Now it's a flat dollar cap, which is much cleaner and allows more people with smaller balances to participate.

Step 2: Choose Your Income Start Date

At purchase, the buyer picks the age at which payments will begin. This can be as soon as a couple of years after purchase or as late as age 85. The SECURE 2.0 Act raised this maximum deferral age from the previous limit of 72 — a substantial improvement that dramatically increases the longevity protection QLACs can provide.

The later the start, the higher the payment. A QLAC purchased at age 65 with payments starting at age 85 will pay significantly more per month than one starting at age 75. That 20-year deferral lets mortality credits and interest accumulation do their work.

Step 3: Your RMDs Get Smaller Immediately

This is the part people love. The day the QLAC is funded, that money comes off the IRA balance for RMD calculation purposes.

Suppose there's $900,000 in a Traditional IRA, and $200,000 of that is used to purchase a QLAC at age 72. RMDs are now calculated on $700,000 instead of $900,000. At the standard RMD factor for age 73, that's roughly $1,600 less in forced withdrawals — and roughly $1,600 less in taxable income that year. Over a decade of RMDs, the tax savings compound.

Step 4: Guaranteed Payments Begin at Your Chosen Age

When the start date arrives, the QLAC begins paying a guaranteed income stream — typically monthly, for life. These payments are fully taxable as ordinary income (it's qualified money, after all), but the timing has been controlled to the buyer's advantage.

Step 5: If You Die Before Payments Start

Unlike many standard deferred income annuities, QLACs are required by regulation to offer a return-of-premium (ROP) death benefit. With this option elected — and electing it is generally a good idea — a beneficiary receives at least the premium paid if death occurs before income begins. This eliminates the biggest fear people have about deferred annuities: the "what if I die and lose everything" scenario.

The return-of-premium option does slightly reduce income payments, but the trade-off is worthwhile for most people.

The SECURE Act Changes: What Improved

The SECURE Act (2019) and SECURE 2.0 Act (2022) made QLACs significantly more attractive. Here's what changed:

These changes were a big deal. The old 25% rule was particularly inconvenient — an IRA balance of $400,000 capped QLAC purchases at $100,000, even though the dollar cap was higher. Now a flat $200,000 applies regardless of the balance, making QLACs accessible to far more people.

Pushing the maximum start date to 85 also opens the door to true "longevity insurance" — income that kicks in precisely when running out of money is most likely.

Who Should Consider a QLAC?

QLACs aren't right for everyone, but they solve a very specific set of problems well.

A sizable Traditional IRA and RMDs that are (or will be) larger than needed. Taking RMDs purely because the IRS requires them — not because the income is needed to live on — is the textbook QLAC use case. A QLAC defers some of that forced distribution and reduces the current tax bill.

Concern about running out of money in your 80s or 90s. QLACs are longevity insurance in the truest sense. Income guaranteed to begin at age 80 or 85 creates a safety net for years when healthcare costs spike and managing investments may be harder.

Managing the tax bracket in early retirement. Smaller RMDs mean lower taxable income, which can help stay in a lower bracket, reduce Medicare IRMAA surcharges, keep more Social Security tax-free, and preserve eligibility for certain deductions.

Other income sources cover your 70s. Since QLAC money is locked up until the chosen start date, other savings, Social Security, or pension income need to carry the interim.

Married and want to protect your spouse. QLACs can be structured as joint-life annuities, providing income to a surviving spouse.

Things to Watch Out For

The $200,000 Cap May Not Move the Needle Enough

A $2 million IRA sheltering $200,000 reduces the RMD calculation by only 10%. The tax savings are real but modest. QLACs work best when $200,000 represents a meaningful percentage of the total qualified balance — say, 15% or more.

Inflation Erosion Is a Real Concern

Buying a QLAC at 60 with payments starting at 85 means 25 years of inflation chipping away at the purchasing power of a fixed payment. At 3% average inflation, a dollar in 25 years buys what 48 cents buys today. Some carriers offer cost-of-living adjustment (COLA) riders, but they significantly reduce the starting payment. Run the numbers both ways.

Carrier Selection Is Critical

A QLAC might not start paying for 15–25 years. That's a long time to rely on a single insurance company's promise. Look for carriers with:

• AM Best ratings of A or better
• Long track records (50+ years in business)
• Strong capital reserves

This isn't the place to chase an extra fraction of a percent.

Roth Conversions Might Be a Better Strategy

A nuance worth considering: if the goal is tax management, Roth conversions can also reduce future RMDs — and they deliver tax-free income in retirement rather than tax-deferred income. The right strategy (QLAC, Roth conversion, or both) depends on the tax bracket, time horizon, and overall plan. Modeling both scenarios is often worthwhile.

Don't Put All Your Eggs in One Basket

A QLAC should be part of a plan, not the entire plan. The pieces tend to work best together:

• Social Security (delay to 70 if possible for maximum benefit)
• Liquid investment portfolio for flexibility
• Possibly a MYGA or fixed annuity for the gap years between retirement and QLAC payments
• Emergency reserves that stay completely accessible

A QLAC Strategy in Action

A realistic example:

Sarah, age 68, has:

• $850,000 in a Traditional IRA
• $300,000 in a brokerage account
• Social Security of $2,800/month starting at age 70

Her concern: Large RMDs starting at 73 aren't needed yet and would push her into a higher tax bracket while increasing her Medicare premiums.

The QLAC move: Sarah invests $200,000 from her IRA into a QLAC with payments starting at age 80.

Result:

• Her IRA balance for RMD purposes drops from $850,000 to $650,000 — roughly a 24% reduction in required distributions
• At age 80, she begins receiving approximately $2,400/month in guaranteed income for life
• She has a reliable income floor in her 80s and 90s — exactly when she's most likely to need it and least likely to want to manage investments
• A return-of-premium benefit goes to her beneficiary if she dies before 80

The net effect: lower taxes in her 70s, guaranteed income in her 80s, and peace of mind throughout.

How QLACs Compare to Regular DIAs

A QLAC is essentially a DIA with special IRS rules attached. The differences:

Buying a deferred income annuity with non-qualified money? A QLAC isn't the right tool — a standard DIA typically offers more flexibility and potentially higher payouts, since it isn't bound by the same regulatory constraints.

Frequently Asked Questions

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