Qualified Longevity Annuity Contract (QLAC): Definition, Taxes, and Example

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A qualified longevity annuity contract (QLAC) is a deferred income annuity bought with money from a traditional IRA or an employer plan such as a 401(k) or 403(b). In exchange for a premium, an insurance company promises guaranteed income for life, starting on a date you choose but no later than the first day of the month after your 85th birthday. The money used to buy a QLAC is excluded from the balance used to calculate required minimum distributions (RMDs) until payments begin. That exclusion drives the core QLAC tax effect: lower taxable withdrawals in your 70s and taxable annuity income later.

How a QLAC works

A QLAC is a deferred annuity that meets IRS requirements set out in the Treasury regulations on longevity annuity contracts. A qualifying contract is treated differently from ordinary IRA assets, and the mechanics follow a fixed sequence:

1. Purchase. You direct money from a traditional IRA, 401(k), 403(b) or similar qualified plan to an insurer. The money stays inside the tax-deferred system, so the purchase is not a taxable distribution.
2. Deferral. You pick an annuity starting date, which can be earlier than 85 but no later than the first day of the month after your 85th birthday.
3. RMD exclusion. Until that date, the premium is left out of the balance that determines your RMDs, which currently start at age 73 and are scheduled to move to 75 in 2033.
4. Payout. From the start date, the insurer pays guaranteed income for life, or for two lives under a joint option.

QLACs have no cash surrender value. They can, however, include a death benefit, such as a return of the premium (minus payments already made) to a beneficiary if you die early. A spouse can be named as a joint annuitant on the same terms. A non-spouse joint annuitant is possible, but age-difference rules can limit the survivor benefit.

Contribution limits

The premium cap applies to the total of all QLACs you own across every IRA and plan, not to each account. SECURE 2.0 set it at $200,000, indexed for inflation, so the figure in a later year may be higher, and removed the earlier rule limiting purchases to 25% of an account balance. Spouses each have their own limit. QLACs cannot be bought inside a Roth IRA, which has no lifetime RMDs to defer.

QLAC taxes

Before payments start. Your other IRA and plan balances keep generating RMDs; the QLAC premium does not. RMDs equal the prior year-end balance divided by an IRS life-expectancy factor, so a smaller countable balance means a smaller required withdrawal. That can keep taxable income in a lower bracket and help with income-based costs such as Medicare premium surcharges, which depend on modified adjusted gross income.

After payments start. QLAC income is taxed as ordinary income in the year you receive it, not at capital gains rates. If the premium came entirely from pre-tax money, as is typical for IRAs and 401(k)s, the full payment is taxable; if the account held after-tax basis, only the taxable portion is. The deferral postpones the tax rather than eliminating it, and depending on your other income at that age, the bill may be higher or lower than on the RMDs you skipped.

The insurer reports QLAC status and values to the IRS and to you on Form 1098-Q, which documents that the contract is a QLAC for RMD purposes.

How RMDs work once QLAC payments begin

The QLAC premium is never added back to your IRA balance for RMD purposes. Once payments begin, the annuity income satisfies the distribution requirement for the QLAC money, while your remaining IRA and plan balances keep producing RMDs under the normal formula. You then have two sources of required taxable income: the QLAC payments and the RMDs from your other accounts.

Example of a qualified longevity annuity contract

Hypothetical example for illustration only. The figures are not any insurer’s terms.

Maria is 75 and has a $600,000 traditional IRA balance at the end of the prior year. Assume an IRS Uniform Lifetime Table factor of 24.6 for her age.

• Without a QLAC: $600,000 ÷ 24.6 ≈ $24,390 RMD
• After moving $150,000 into a QLAC: $450,000 ÷ 24.6 ≈ $18,293 RMD

Her required withdrawal falls by about $6,098 that year. The reduction continues each year until the QLAC starts and also covers any growth the $150,000 would have produced inside the IRA.

Maria chooses a start date at 85. From then on she receives a lifetime income, with the amount set by the insurer’s quote at purchase. All of those payments are taxed as ordinary income. If she dies before receiving $150,000 and chose a return-of-premium death benefit, her beneficiary receives the difference.

Ways to structure a QLAC

Laddering. You can buy several contracts over a few years instead of one. Payout rates move with interest rates, so spreading purchases works much like dollar-cost averaging. The contracts can start in the same year or be staggered, for example at 78, then 79, and so on, as long as each starts no later than the month after age 85.

Cost-of-living adjustment. Some contracts add an inflation adjustment so payments rise over time. It lowers the starting payment, so it pays off mainly if you live a long time, but a fixed payment starting 10 or more years out can lose meaningful purchasing power, as long-run U.S. inflation rates by year show.

Joint coverage and death benefits. A joint life option keeps income going to a surviving spouse. A return-of-premium feature protects heirs against early death. Each option lowers the income the contract pays.

Limitations of a QLAC

• Illiquidity. Once bought, a QLAC generally cannot be cashed out, apart from limited exceptions such as a free-look period.
• Issuer risk. The guarantee is only as strong as the insurance company behind it. This is the main risk of the product.
• Opportunity cost. The money gives up market exposure and flexibility. Without a death benefit, dying before or soon after payments start may mean the contract returns little.
• Costs inside the price. There may be no separate purchase fee, but commissions, embedded costs and rider prices are reflected in the payout, so compare income quotes for the same premium and start date.

QLAC vs. related options

QLAC vs. immediate annuity. An immediate annuity starts paying almost right away and does not defer RMDs. A QLAC is built for late-life income and RMD relief.

QLAC vs. ordinary deferred annuity in an IRA. A deferred annuity that does not meet QLAC rules stays in the RMD calculation, so it does not reduce required withdrawals.

QLAC vs. Roth conversion. Both can lower future RMDs, but in opposite ways. A Roth conversion pays tax now and permanently removes the money from lifetime RMDs, with tax-free qualified withdrawals later. A QLAC pays no tax now and ordinary income tax later, in return for guaranteed lifetime income.

FAQs

The Bottom Line

A QLAC fits retirees with traditional IRA or 401(k) savings who want smaller required withdrawals in their 70s and guaranteed income late in life. The trade is illiquid money, insurer risk and ordinary income tax on every payment later. Compare income quotes for the same premium and start date, and weigh joint coverage, return of premium and inflation adjustments against the lower payout each one brings.