Qualified Longevity Annuity Contract

A Qualified Longevity Annuity Contract (QLAC) is a deferred-income annuity purchased inside an IRA or qualified employer plan that allows the account owner to exclude the annuity cost from required minimum distribution calculations, deferring both the distribution obligation and tax until annuity payments begin, typically at age 80–85.

Why the RMD burden creates demand for QLACs

At age 73 (as of 2024), traditional IRA owners and participants in qualified employer plans must begin taking required minimum distributions (RMDs). These are calculated by dividing the account balance by a life-expectancy factor set by the IRS.

For many, RMDs are a tax nightmare. A retiree with a $3 million IRA might be forced to take $100,000+ annually, whether or not they need the cash. This large distribution can push them into a higher tax bracket, triggering higher Medicare premiums, reducing qualified dividend treatment, or phasing out deductions. It is taxation by IRS formula, not by choice.

A QLAC lets them sidestep this trap. By converting $145,000 (the current limit) of IRA assets into a deferred annuity, that $145,000 is simply removed from the RMD calculation going forward. The result: a smaller RMD every year for the next 8–17 years.

How QLAC mechanics work

You own a traditional IRA with a $3 million balance at age 72. Your RMD for the year is normally calculated as:

Balance ÷ Life Expectancy Factor = RMD

If your factor is 27.4 (IRS Table), you owe roughly $109,500.

Now you use $145,000 of your IRA to purchase a QLAC—a deferred-income annuity that will begin paying you monthly starting at age 82. The remaining IRA balance is $2.855 million. Your RMD is now based on that smaller number:

$2.855 million ÷ 27.4 = $104,200

You have reduced your RMD. The cost: you have foregone access to that $145,000 until age 82, and once payments begin, they last only as long as you live. If you die before age 82, the insurance company keeps the money.

Tax consequences of purchase and payment

At purchase: There is no immediate tax consequence. You are simply moving IRA assets from liquid investments (stocks, bonds, funds) into an annuity contract. The IRA custodian processes this as a transfer.

At age 82 (or whenever payments start): Each annuity payment is partially taxable. The insurance company calculates an exclusion ratio based on your cost basis (the $145,000 you paid) divided by the total expected payments over your life expectancy. You recover cost basis tax-free, and the remainder is ordinary income.

Example: Your $145,000 QLAC is expected to pay $20,000 annually for 25 years (assuming you live to 107). Your exclusion ratio is:

$145,000 ÷ ($20,000 × 25) = 29%

Each $20,000 payment has $5,800 as non-taxable return of basis and $14,200 as ordinary income.

This is vastly more efficient than taking a full lump-sum RMD withdrawal, where the entire amount is ordinary income at once.

The mortality gamble

QLACs come with an unsentimental premise: if you die before payouts begin (or before recovering your cost basis), the insurance company pockets the unused principal. This is why QLACs only make sense if you are confident you will live into your early 80s and beyond.

For someone with serious health issues or family history of early mortality, a QLAC is a bad bet. You tie up your assets for 8–17 years and then lose them if you die before payout begins.

But for someone healthy at 70, expecting to live to 85+, the trade-off is rational. You get 8–17 years of lower RMDs, which means lower taxes and lower Medicare hit. If you live into your 80s, the annuity provides guaranteed income and completes your tax-deferral strategy.

Coordination with Social Security and pension strategies

A QLAC fits naturally into broader retirement income planning. Many workers have a pension (paying 60–70% of pre-retirement income), Social Security (starting as late as age 70), and a large IRA. The QLAC can be timed to bridge the gap before pensions and Social Security mature.

Example: At 73, your RMD would be $110,000 and very painful. But you have a pension of $40,000 and moderate living expenses. You buy a QLAC with $145,000, reducing your new RMD to $90,000. You supplement with $40,000 from your pension. Total income: $130,000, all manageable and in a lower bracket. At 82, the QLAC payments begin—$20,000/year, on top of your pension and Social Security. You have built yourself a ladder of guaranteed income.

Limits and restrictions

The IRS caps QLAC investment at $145,000 per person (or $290,000 for joint-life annuities). This is modest compared to large IRAs, but for many retirees it is sufficient to blunt the RMD edge.

You cannot invest QLAC funds in anything other than a deferred-income annuity. No stocks, bonds, or managed funds inside the QLAC wrapper. The entire purpose is longevity insurance—predictable income from age 80+ onward.

If your spouse is your beneficiary, some QLACs offer a survivor option, where payments continue to your spouse at a reduced rate after your death. But this is optional and reduces your own payout.

When QLACs fall short

QLACs are not for everyone. If you have modest IRA balances (under $1 million), the RMD burden is manageable without special tactics. And if you are in poor health or expect limited longevity, the mortality risk dominates.

They also do not solve the fundamental problem of large IRAs. A $3 million IRA still generates massive RMDs even with a $145,000 QLAC. The QLAC is a tweak, not an overhaul. For truly large IRAs, Roth conversion strategies or charitable giving are more powerful.

And QLACs work only inside retirement accounts. A wealthy individual with most of their wealth in taxable brokerage accounts cannot use a QLAC. Other strategies like private placement life insurance or annuitisation outside the IRA may be more helpful.

See also