Qualified Longevity Annuity Contract (QLAC)

Key takeaways
* A QLAC is a deferred annuity purchased with funds from a qualified retirement account (such as a 401(k), 403(b), or IRA).
* It defers a portion of required minimum distributions (RMDs) and provides guaranteed lifetime income starting on a preset date (no later than the annuitant’s 85th birthday).
* Payments are taxed as ordinary income when they begin. The primary risks are loss of liquidity and the financial strength of the issuing insurer.

What is a QLAC?

A Qualified Longevity Annuity Contract (QLAC) is a type of deferred annuity bought with money from a qualified retirement plan or IRA. The buyer pays a lump sum (single premium) to an insurance company in exchange for guaranteed future monthly payments that begin on a preselected date. Because the funds moved into a QLAC are excluded from account balances used to calculate RMDs, QLACs can reduce or delay RMDs and the tax consequences associated with them.

How a QLAC works

• Funding: Purchased using money from a qualified retirement account (e.g., 401(k), 403(b), or IRA). The premium is generally paid in a single lump sum.
• Payout start date: The owner designates when payments begin; payouts can be deferred but must start no later than the owner’s 85th birthday.
• Lifetime income: Once payouts begin, the contract typically provides income for the life of the annuitant (or joint annuitants, if elected).
• RMD treatment: QLAC amounts are excluded from the retirement account balance when calculating annual RMDs until the QLAC payout start date (or until age 85), effectively deferring taxable distributions on that portion.

Tax and retirement-plan implications

• Deferral of RMDs: Moving funds into a QLAC reduces the balance used to calculate RMDs from other retirement accounts, which can lower taxable income in earlier retirement years and may help keep taxes or Medicare premiums lower.
• Taxation on payments: Income received from the QLAC after the start date is taxed at ordinary income rates.
• Compliance: The QLAC must meet IRS rules to retain its favorable RMD treatment. Failure to follow the rules can negate the intended benefits.

Options and common features

• Joint annuitant: You can name a spouse or other joint annuitant so payments continue based on the contract’s survivor provisions.
• Laddering: Some buyers purchase multiple QLACs over several years to stagger payout start dates and potentially average purchase pricing, similar to dollar-cost averaging.
• Cost-of-living adjustments (COLA): Optional indexing to inflation is available, but choosing COLA usually reduces the initial payout amount.
• Purchase mechanics: Typically a single premium purchase from a retirement account; advertised descriptions may state “no fees associated with the purchase,” though contract terms vary by provider.

Risks and limitations

• Inflexibility: Money used to buy a QLAC becomes generally illiquid until payouts begin. This can be a major drawback if you later need access to those funds.
• Insurer credit risk: The guarantees depend on the financial strength of the issuing insurance company. If the company struggles or fails, payments may be at risk.
• Future tax increase: While QLACs defer taxes early in retirement, payments will be taxable later; if tax rates rise, your future tax burden could be higher.

Example

At age 67, a retiree anticipates substantial RMDs beginning in their early 70s. They invest $100,000 from an IRA into a QLAC with payouts beginning at age 85. The $100,000 is excluded from IRA balances used to compute RMDs until age 85, reducing early retirement RMDs and taxable income. At age 85 the QLAC begins providing guaranteed lifetime income, which is then taxed as ordinary income.

Common questions

Q: When do I pay taxes on a QLAC?
A: Taxes are paid when the annuity payments begin; those payments are taxed as ordinary income.

Q: Can I access the money before payouts start?
A: Generally no. QLACs are designed to be illiquid until the annuity start date, which is why they are best suited for people who do not need that capital earlier.

Q: Are there purchase fees?
A: QLACs are usually bought via a single premium from a retirement account. Some descriptions state there are no purchase fees, but contract terms vary—review the insurer’s contract and disclosures.

Bottom line

A QLAC is a tool to convert part of a qualified retirement account into deferred, guaranteed lifetime income while deferring RMDs on that portion until payouts begin (no later than age 85). It can reduce taxable income in early retirement and provide longevity protection, but it is illiquid and depends on the insurer’s financial strength. Carefully evaluate your retirement income needs, liquidity requirements, and the issuing company’s creditworthiness before purchasing.

Selected references

Sources for QLAC rules and guidance include IRS guidance on annuity contracts and legislative summaries such as the SECURE 2.0 Act of 2022 and government publications on longevity annuity contracts.