One of the hardest problems in retirement planning is not knowing how long you will live. Spend too fast and you could run short in your 90s; spend too cautiously and you may give up a more comfortable life in your 60s and 70s. A qualifying longevity annuity contract, or QLAC, is a tool designed to address that risk while also offering a tax benefit for people with large traditional retirement accounts.
A QLAC is a deferred income annuity bought with money from an eligible retirement account. It starts paying guaranteed income at a future date, as late as age 85, and the premium is excluded from the account balance used to calculate required minimum distributions (RMDs) until payments begin. This guide explains how QLACs work, the current limits, the advantages and drawbacks, and what to consider before buying one.
How a QLAC Works
When you buy a QLAC, you transfer a lump sum from a traditional IRA, 401(k), 403(b), or governmental 457(b) plan to an insurance company. In exchange, the insurer promises to pay you a stream of income starting on a date you choose. Because payments are deferred, often for a decade or more, the insurer can offer substantially larger payments than an immediate annuity bought with the same premium.
The tax rules for QLACs come from Treasury regulations issued in 2014 and were expanded by the SECURE 2.0 Act of 2022. Key features include:
- Payments must begin no later than the first day of the month after you turn 85. You can choose an earlier start date.
- The premium is excluded from RMD calculations until payments begin.
- Income is taxed as ordinary income when received, because it comes from pretax money.
- The contract must be a fixed annuity. Variable annuities and indexed annuities do not qualify, though some QLACs allow cost-of-living increases specified at purchase.
- There is no cash surrender value. You cannot withdraw the premium once the free-look period ends.
QLAC Contribution Limits
Before SECURE 2.0, QLAC premiums were limited to the lesser of $125,000 or 25% of your retirement account balance. SECURE 2.0 eliminated the 25% limit and raised the dollar cap to $200,000, indexed for inflation. The IRS raised the limit to $210,000 for 2025. Check the current IRS figure for the year you plan to buy.
The limit applies per person across all of your QLACs and eligible accounts, not per account. A married couple can each buy up to the limit using their own retirement accounts.
Eligible and Ineligible Accounts
QLACs can be purchased with money from:
- Traditional IRAs, including SEP and SIMPLE IRAs.
- 401(k) plans, 403(b) plans, and governmental 457(b) plans, if the plan offers a QLAC option.
Roth IRAs are not eligible, because Roth IRAs have no lifetime RMDs for the original owner, so there is no RMD benefit to provide. Inherited IRAs are also generally not used for QLACs. Many employer plans do not offer QLACs directly, so people often roll money to an IRA first.
The RMD Benefit Explained
RMDs generally begin at age 73 for people born between 1951 and 1959, and at 75 for those born in 1960 or later. Each year’s RMD is calculated by dividing the prior year-end account balance by a life expectancy factor. Because the QLAC premium is excluded from that balance, buying a QLAC lowers the RMD until the annuity starts paying.
Example: Suppose a retiree has a $1 million IRA and buys a $200,000 QLAC. Her RMD would be calculated on $800,000 instead of $1 million, reducing the required withdrawal by about 20% in each year before the annuity begins. Lower RMDs can mean lower taxable income in those years, which may also help with Medicare premium surcharges and the taxation of Social Security benefits.
The tax is deferred, not eliminated. Once QLAC payments start, they are fully taxable as ordinary income.
Death Benefit Options
A common worry about annuities is that you might die before receiving much income. QLACs address this with optional death benefits:
- Life only: Payments last for your lifetime and stop at death. This produces the highest income but nothing for heirs.
- Return of premium: If you die before receiving payments equal to the premium, the difference is paid to beneficiaries. SECURE 2.0 clarified that a return-of-premium feature is permitted both before and after the annuity starting date.
- Joint life: Payments continue for the life of a surviving spouse. SECURE 2.0 also made it easier to keep joint-life payments after a divorce in certain cases.
Death benefit features reduce the monthly income you receive in exchange for protection for your heirs.
Free-Look Period
SECURE 2.0 permits QLACs to offer a free-look period of up to 90 days, during which you can cancel and receive your premium back. Check the specific contract and state rules before buying.
Advantages of a QLAC
- Longevity protection: Guaranteed income that lasts as long as you live, starting at an age when other savings may be running low.
- Lower RMDs: Reduced required withdrawals and taxable income in your 70s and early 80s.
- Simpler spending planning: Knowing that income will begin later can make it easier to spend other savings with confidence.
- No market risk on payments: Payments are fixed by contract and do not depend on market returns.
Disadvantages and Risks
- Illiquidity: The premium is locked up with no cash value.
- Inflation risk: Fixed payments lose purchasing power over time unless you choose a contract with built-in increases, which lowers the starting payment.
- Insurer risk: Payments depend on the claims-paying ability of the insurance company. State guaranty associations provide some protection up to limits that vary by state.
- Opportunity cost: Money in a QLAC cannot be invested in stocks or other assets that may grow faster.
- Mortality risk: Without a death benefit, you or your heirs could receive less than the premium if you die early.
- Tax deferral is limited: The RMD savings may be modest relative to the size of the account.
Who Might Benefit From a QLAC?
A QLAC may make sense for someone who:
- Has significant traditional retirement savings and expects RMDs that exceed spending needs.
- Is in good health and has a family history of longevity.
- Wants guaranteed income later in life to complement Social Security and pensions.
- Has enough other liquid savings to handle emergencies and earlier retirement years.
It may be less suitable for people with modest savings, serious health issues, high near-term spending needs, or a strong desire to leave the entire account to heirs.
How to Buy a QLAC
- Decide how much to allocate within the IRS limit, leaving enough liquidity for other needs.
- Choose a start date, from a few years out up to age 85. Later start dates produce higher payments.
- Pick death benefit and joint-life options.
- Compare quotes from multiple highly rated insurers, because payout rates differ.
- Confirm the contract is designated as a QLAC. The insurer must state that the contract is intended to be a QLAC, and it reports QLAC premiums to the IRS on Form 1098-Q.
- Fund the purchase by direct transfer from your IRA or plan to avoid taxable distributions.
A fee-only financial planner can help evaluate whether a QLAC fits your plan and compare it with alternatives such as delaying Social Security, which is another way to buy more guaranteed lifetime income.
Related reading: Backdoor Roth IRA: Step-by-Step Rules, the Pro-Rata Trap, and Reporting on Form 8606.
Frequently Asked Questions
Q: What does QLAC stand for?
QLAC stands for qualifying longevity annuity contract. It is a deferred income annuity purchased with eligible retirement account money that meets IRS requirements.
Q: How much can I put into a QLAC?
SECURE 2.0 set the limit at $200,000, indexed for inflation, and removed the old 25% of account balance cap. The limit was $210,000 for 2025. Check the IRS figure for your purchase year.
Q: When do QLAC payments have to start?
No later than the first day of the month after your 85th birthday. You can choose an earlier date.
Q: Can I buy a QLAC in a Roth IRA?
No. Roth IRAs are not eligible because they have no lifetime RMDs for the original owner.
Q: Are QLAC payments taxable?
Yes. Payments are taxed as ordinary income because they come from pretax retirement money.
Q: What happens to a QLAC if I die before payments start?
It depends on the options you chose. With a return-of-premium death benefit, beneficiaries receive the premium. With a life-only contract, nothing is paid. A joint-life contract can provide income for a surviving spouse.
The Bottom Line
A QLAC turns part of a retirement account into guaranteed income for your later years while lowering RMDs in the meantime. It is not right for everyone, given the illiquidity and inflation risk, but for retirees with substantial traditional savings and concerns about outliving their money, it can be a valuable piece of the plan.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
