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: you've saved diligently in your IRA for decades, you don't need all of it yet, but the IRS says you have to start taking money out anyway. Those required minimum distributions — RMDs — start at age 73 (75 starting in 2033), and they force you to withdraw a growing percentage of your IRA every year, whether you want to or not.

Each withdrawal gets taxed as ordinary income. If you don't actually need the money to live on, you're essentially being forced into a higher tax bracket for no practical reason.

Enter the QLAC — the Qualified Longevity Annuity Contract.

A QLAC is a specific type of deferred income annuity that the IRS blessed with a special superpower: the money you put into a QLAC gets excluded from your RMD calculations. It's one of the very few legal ways to reduce your required minimum distributions.

Think of it this way: a QLAC lets you take a chunk of your IRA and say, "I'm converting this into a guaranteed pension that starts paying me later — and in the meantime, the IRS can't force me to withdraw it."

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 you can invest is $200,000 across all your 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 your account balance. Now it's just a flat dollar cap, which is much cleaner and allows more people with smaller balances to participate.

Step 2: Choose Your Income Start Date

When you buy a QLAC, you pick 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 huge improvement that dramatically increases the longevity protection QLACs can provide.

The later you start, the higher your payments. 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 period lets mortality credits and interest accumulation work their magic.

Step 3: Your RMDs Get Smaller Immediately

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

Let's say you have $900,000 in your Traditional IRA and you purchase a $200,000 QLAC at age 72. Your RMDs are now calculated based on $700,000 instead of $900,000. At the standard RMD factor for age 73, that's roughly $1,600 less you're forced to withdraw — 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 your start date arrives, the QLAC begins paying you a guaranteed income stream — typically monthly, for life. These payments are fully taxable as ordinary income (it's qualified money, after all), but you've controlled the timing to your 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. If you elect this option — and we strongly recommend that you do — your beneficiary receives at least the premium you paid if you die 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 your income payments, but we think it's well worth the trade-off 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 annoying — if you had $400,000 in your IRA, you could only put $100,000 into a QLAC even though the dollar cap was higher. Now a flat $200,000 applies regardless of your balance, making QLACs accessible to far more people.

And pushing the maximum start date to 85 means you can create true "longevity insurance" — income that kicks in precisely when you're most vulnerable to running out of money.

Who Should Consider a QLAC?

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

You have a sizable Traditional IRA and your RMDs are (or will be) larger than you need. If you're taking RMDs just because the IRS makes you — not because you need the income — a QLAC lets you defer some of that forced distribution and reduce your current tax bill.

You're concerned about running out of money in your 80s or 90s. QLACs are longevity insurance in the truest sense. By guaranteeing income that starts at age 80 or 85, you create a safety net for the years when healthcare costs spike and cognitive decline might make investment management harder.

You want to manage your tax bracket in early retirement. Smaller RMDs mean lower taxable income, which could help you stay in a lower bracket, reduce Medicare IRMAA surcharges, keep more Social Security tax-free, and preserve eligibility for certain deductions.

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

You're married and want to protect your spouse. QLACs can be structured as joint-life annuities, providing income to your surviving spouse after you pass away.

Things to Watch Out For

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

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

Inflation Erosion Is a Real Concern

If you buy a QLAC at 60 with payments starting at 85, that's 25 years of inflation eating into 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 your starting payment. Run the numbers both ways.

Carrier Selection Is Critical

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

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

We vet every carrier we recommend on these criteria. This isn't the place to chase an extra fraction of a percent.

Roth Conversions Might Be a Better Strategy

Here's a nuance worth considering: if your goal is tax management, Roth conversions can also reduce your future RMDs — and they give you tax-free income in retirement rather than tax-deferred income. The right strategy (QLAC, Roth conversion, or both) depends on your tax bracket, time horizon, and overall plan. We regularly model both scenarios for clients.

Don't Put All Your Eggs in One Basket

A QLAC should be part of your plan, not your entire plan. We recommend using it alongside other income sources:

• Social Security (delay to 70 if possible for maximum benefit)
• Liquid investment portfolio for flexibility
• Maybe 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

Let's walk through 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: She doesn't want to take large RMDs starting at 73 because she won't need the money yet, and the extra income would push her into a higher tax bracket and increase 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 her required distributions
• At age 80, she starts receiving approximately $2,400/month in guaranteed income for life
• This creates 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
• Her beneficiary receives a return-of-premium benefit 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. Here's how they compare:

If you're buying a deferred income annuity with non-qualified money, you don't need a QLAC — a standard DIA will often offer more flexibility and potentially higher payouts since it doesn't have the regulatory constraints.

Frequently Asked Questions

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