A Qualified Longevity Annuity Contract (QLAC) is a special type of deferred annuity you buy with IRA or 401(k) funds to guarantee income later in retirement. You can invest up to $210,000 (2025 limit), delay payments until age 85, and reduce your required minimum distributions along the way. It’s designed to protect against one of retirement’s biggest risks: outliving your savings.
Running out of money in your 80s or 90s is a real fear for many retirees. You’ve saved for decades, but how do you know it’ll last? That’s exactly the problem a QLAC is designed to solve.
In our 30+ years helping clients plan for retirement, we’ve seen this concern come up again and again. A QLAC won’t be the right fit for everyone, but for the right person, it can provide serious peace of mind. Let’s break down how it works, what’s changed for 2025, and whether it makes sense for your situation.
How a QLAC Works
A QLAC is a type of deferred income annuity. You purchase it using money from your traditional IRA, 401(k), 403(b), or similar retirement account. Instead of getting payments right away like an immediate annuity, you choose a future start date, typically somewhere between age 75 and 85.
Here’s the basic process:
You transfer funds from your retirement account to an insurance company. That money grows during the deferral period. Then, at the age you selected, you start receiving guaranteed monthly payments for the rest of your life.
The longer you wait to start payments, the higher those payments will be. That’s because the insurance company has more time to grow your premium, and statistically, they’ll pay you for fewer years.
One important note: a QLAC must be a fixed annuity. Variable annuities and indexed annuities don’t qualify. The contract must also state that it’s intended to be a QLAC.
Unlike a SPIA which starts payments immediately, a QLAC delays income to a future date (up to age 85), helping you protect against outliving your savings in later retirement years.
2026 QLAC Rules and Contribution Limits
The rules around QLACs got simpler thanks to the SECURE Act 2.0. Here’s what you need to know for 2025 based on current IRS regulations:
Maximum contribution: You can invest up to $210,000 from your retirement accounts into a QLAC. This is a lifetime limit per person, not an annual limit. If you’re married, your spouse can also invest up to $210,000 in their own QLAC.
No more 25% rule: Before 2023, you could only use the lesser of $145,000 or 25% of your account balance. That percentage limit is gone. Now it’s just the flat dollar cap.
Latest start date: Payments must begin by age 85. You can start earlier if you prefer.
Eligible accounts: Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and 457(b) plans. Roth IRAs don’t qualify because they already have different RMD rules.
RMD exclusion: The amount you put into a QLAC isn’t counted when calculating your required minimum distributions. This is one of the biggest advantages.
Why RMD Reduction Matters
Required minimum distributions can create a tax headache. Once you hit age 73 (or 75 if you were born in 1960 or later), you have to start withdrawing from your traditional retirement accounts whether you need the money or not. Those withdrawals count as taxable income.
If you don’t need all that income to cover expenses, you’re paying taxes on money you didn’t want to take out in the first place. A QLAC changes that equation.
Let’s say you have $500,000 in your IRA and you put $150,000 into a QLAC at age 70. When you turn 73 and RMDs kick in, your distributions are calculated on $350,000, not the full $500,000. That can mean thousands less in taxes each year during the early part of your retirement.
The trade-off? You’re locking up that $150,000 until your QLAC payments begin. But if you have other income sources to cover expenses in the meantime, this can be a smart tax strategy.
Benefits of a QLAC
Guaranteed lifetime income. Once payments start, they continue for as long as you live. You can’t outlive a QLAC. For people worried about longevity risk, this is the core appeal.
Tax-deferred growth. Your premium grows during the deferral period without being taxed. You only pay taxes when you start receiving payments.
Lower RMDs. By excluding QLAC funds from your RMD calculation, you can reduce your taxable income in the years before payments begin.
Simplicity. QLACs are straightforward compared to other annuity types. There’s no market exposure, no complicated riders to evaluate, and no annual fees eating into your returns.
Spousal protection. You can set up a joint-life QLAC that continues paying your spouse after you pass away. This adds security for both of you.
Risks and Drawbacks to Consider
QLACs aren’t perfect. Before you commit, understand the downsides.
No liquidity. Once you buy a QLAC, that money is locked up. You can’t access it for emergencies or change your mind later. If you need flexibility, this could be a problem.
Inflation risk. QLAC payments are typically fixed. A payment that feels comfortable at age 80 might not stretch as far at age 90 after years of inflation. Some contracts offer inflation adjustments, but they reduce your initial payment amount.
You might not live long enough. If you pass away before payments begin, your heirs may receive less than you put in, depending on the contract terms. Most QLACs offer a death benefit, but it’s usually just a return of premium, not the future income stream.
Opportunity cost. Money in a QLAC isn’t invested in the market. If stocks perform well during your deferral period, you won’t benefit from those gains.
Limited inheritance. Unlike other assets, a QLAC is designed to pay you, not build wealth for your heirs. If leaving a legacy is a priority, this may not align with your goals.
Who Should Consider a QLAC?
A QLAC tends to work best for people in specific situations. Here’s who we typically recommend consider one:
You have substantial retirement savings. If you’ve built a solid nest egg and can afford to set aside $100,000 or more without affecting your near-term security, a QLAC becomes more practical.
You’re healthy with a family history of longevity. The math works better if you expect to live into your late 80s or 90s. If you have health concerns that could shorten your lifespan, a QLAC may not pay off.
You want to reduce taxes now. If you’re in a higher tax bracket and don’t need your full RMDs to live on, reducing those distributions can save real money.
You’re comfortable with less control. A QLAC requires giving up access to funds. If that makes you anxious, it’s probably not the right tool.
When a QLAC Might Not Make Sense
Not everyone benefits from a QLAC. Here are situations where you might want to skip it:
Limited savings. If you need most of your retirement funds to cover living expenses, locking up money until age 80 or 85 isn’t practical.
Uncertain health. If you have a serious health condition or don’t expect to live well into your 80s, you might not receive enough payments to justify the purchase.
Legacy priorities. If passing wealth to children or charities is more important than maximizing your own income, other strategies may serve you better.
Need for flexibility. Life is unpredictable. If you think you might need access to those funds, a QLAC’s restrictions could work against you.
How to Purchase a QLAC
Buying a QLAC involves a few key steps. Here’s how the process typically works.
Choose a reputable insurance company. Look for insurers with strong financial ratings. You’re trusting them to pay you decades from now, so stability matters. Check ratings from A.M. Best, Moody’s, or Standard & Poor’s.
Decide how much to invest. Consider your overall retirement picture. How much do you need for near-term expenses? What other income sources do you have? Don’t overcommit to a QLAC at the expense of liquidity.
Select your income start date. The longer you defer, the higher your payments. But don’t defer so long that you miss years of income you could have used.
Review the contract carefully. Understand the death benefit provisions, any fees, and whether inflation adjustments are available. Make sure the contract explicitly states it’s a QLAC.
Work with an advisor. A QLAC is a significant, irreversible decision. We’re happy to walk through your specific numbers and help you decide if it fits your plan.
Frequently Asked Questions
What happens to my QLAC if I die before payments start?
Most QLACs include a death benefit that returns your premium to your beneficiaries. The exact terms vary by contract, so review this carefully before purchasing. Some contracts offer a return of premium option, while others may provide reduced survivor benefits.
Can I buy a QLAC with Roth IRA funds?
No. QLACs can only be purchased with pre-tax retirement funds from traditional IRAs, 401(k)s, 403(b)s, and similar plans. Roth IRAs have different RMD rules and don’t qualify.
What’s the difference between a QLAC and a regular deferred annuity?
The main difference is the RMD treatment. A regular deferred annuity purchased with IRA funds is still subject to RMD calculations. A QLAC specifically excludes those funds from RMDs until payments begin, and it must meet IRS requirements including the $210,000 limit.
Can I change my QLAC after I buy it?
Generally, no. Once you purchase a QLAC, the terms are locked in. Some insurers allow you to change the income start date before payments begin, but you can’t withdraw the funds or cancel the contract. This is why it’s important to be confident before you commit.
How are QLAC payments taxed?
Payments from a QLAC are taxed as ordinary income in the year you receive them. This is the same treatment as other distributions from traditional IRAs or 401(k)s. You’ve deferred the taxes, not eliminated them.
Key Takeaways
- A QLAC provides guaranteed income later in retirement, protecting against the risk of outliving your savings.
- The 2026 contribution limit is $210,000 per person, and the old 25% rule has been eliminated.
- QLAC funds are excluded from RMD calculations, which can reduce your taxable income before payments begin.
- Payments must start by age 85, and you can choose any start date before then.
- QLACs work best for healthy individuals with substantial savings who want tax advantages and guaranteed income in their later years.
- The trade-off is lack of liquidity, so only invest money you won’t need access to before payments begin.
Ready to see if a QLAC fits your retirement plan? Let’s look at your specific situation together. We’ll help you understand the numbers and decide if this strategy makes sense for you.
