Qualified Longevity Annuity Contracts and RMD Deferral

A qualified longevity annuity contract (QLAC) is a tax-favored vehicle that lets IRA and 401(k) owners convert a lump sum into an insurance company-issued annuity whose income payments are deferred until age 85 or later, effectively removing that sum from required minimum distribution (RMD) calculations during the deferral phase.

Why RMDs Motivate Longevity Annuities

Starting at age 73, IRA and 401(k) plan owners must withdraw a calculated percentage of their account balance each year and pay ordinary income tax on those distributions. For wealthy retirees with large balances, RMDs can balloon income, triggering higher tax brackets, reducing Social Security tax benefits, and increasing Medicare premiums.

A QLAC directly shrinks the account balance used to calculate the RMD. By moving $100,000 into a longevity annuity, the IRA balance subject to RMD rules drops by $100,000 immediately. That means smaller mandatory withdrawals during your early-to-mid retirement years, when you may not need the full amount and when high income could have adverse tax consequences.

The catch is that you’ve exchanged liquidity and control for a fixed income stream you cannot access until the deferral period ends—typically age 85. The trade is intentional: longevity annuities are designed for people who expect to live past 85 and want to protect themselves against outliving their assets.

How the QLAC Transaction Works

You direct your IRA or 401(k) plan custodian to transfer funds directly to an insurance company. The insurance company issues an annuity contract that promises to pay you a guaranteed monthly or annual income beginning on a date you select (the “annuity start date”), generally between ages 80 and 85.

Until the annuity start date arrives, you receive no income from the QLAC, and the IRS does not count it toward your RMD. The insurance company invests the lump sum, bearing longevity risk: if you live very long, it pays out far more than the premium; if you die early, it keeps the balance.

Once income begins, you receive regular payments. The tax treatment follows the annuity rules: each payment is partly a return of your original investment (tax-free) and partly gain (taxed as ordinary income). The IRS calculates the taxable portion using IRS unisex mortality tables and your age at annuity start.

Contribution Limits and Current Caps

The IRS imposes a dollar cap on QLAC investments. For 2025, you can invest up to $145,000 per account (this limit adjusts annually for inflation). If you own both a Traditional IRA and a 401(k), you can place $145,000 in each, for a combined $290,000.

Important: this cap applies per account type. A $145,000 limit applies to IRAs collectively (treating Traditional, SEP, and SIMPLE as one class for aggregation), and a separate $145,000 cap applies to 401(k) plans. Some employers may set lower limits in their plan documents.

The cap is designed to prevent high earners from sheltering unlimited retirement assets. The IRS reviews the cap every three years and adjusts it upward for inflation.

The Payout Phase and Tax Reporting

Suppose you were born in 1960 and purchase a QLAC in 2025 at age 65, with payouts starting at age 85 in 2040. You make no withdrawals from the QLAC for 15 years. At age 85, the insurance company begins sending you monthly checks. Each check is treated as if you received an annuity payout.

The insurance company (or your IRA custodian on its behalf) reports the taxable portion on Form 1099-R. You report it as ordinary income on your tax return. The non-taxable portion—your return of principal—is not taxed again.

This approach is tax-efficient compared to holding the full balance in a traditional IRA, because the income tax is deferred until you actually receive distributions, and by then you may be in a lower bracket or have other income sources that are more beneficial to the overall tax picture.

Longevity Insurance vs. Investment Return

A QLAC is an insurance product, not an investment. The insurance company typically earns a spread between the yield on its bond portfolio and the fixed income it pays you, covering administration and mortality risk.

This means a QLAC generally offers a lower nominal rate of return than a diversified stock-and-bond portfolio might produce. The value of a QLAC is not growth; it is certainty and longevity protection. You know your income floor, regardless of market conditions. If you live to 95 or 100, the insurance company keeps paying, even if you’ve received far more than your initial premium.

For retirees who fear outliving their assets and want guaranteed income, this trade-off is often rational. For those who believe they will have adequate income from Social Security and pensions, a QLAC may be unnecessary.

Eligible and Ineligible Accounts

You can fund a QLAC from:

• A Traditional IRA
• A SEP-IRA or SIMPLE IRA
• A 401(k) plan (including Roth 401(k) plans, though the QLAC itself is typically held on a tax-deferred basis)
• An IRA inherited from your spouse (if you treat it as your own)

You cannot fund a QLAC from:

• A Roth IRA (because Roth distributions are already tax-free and the QLAC defers taxation)
• A taxable brokerage account (outside the tax-qualified system)
• An inherited IRA from a non-spouse beneficiary

RMD Calculations: Before and After

Suppose you have a Traditional IRA with a $1,000,000 balance at age 75, when the IRS RMD divisor is 24.2 (as of 2025 rules). Your RMD is roughly $41,322.

If you then invest $145,000 in a QLAC, your new IRA balance is $855,000, and your RMD becomes approximately $35,331—a reduction of about $6,000 per year. Over many years, this deferral of taxation can be substantial, especially if your income is otherwise high.

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