Introduction
Plenty of retirees have enough income for the first decade or so of retirement. The harder question is age 85 and beyond. Savings can run thin, while required minimum distributions (RMDs) force taxable withdrawals from pre-tax accounts before the money is needed.
A qualified longevity annuity contract (QLAC) targets both problems. It is a deferred income annuity bought with eligible retirement money, paying guaranteed income starting at a future date. SSA life tables show a 65-year-old woman has a 56.6% chance of reaching 85, and a man has a 44.9% chance.
This article covers eligibility, RMD treatment, costs, benefits, risks, and alternatives. A QLAC trades liquidity and investment flexibility for future income certainty, so it doesn't fit everyone.
Key Takeaways
- A QLAC turns part of your eligible retirement savings into guaranteed income starting at a future date.
- QLAC value is excluded from RMD calculations until payments begin, but payments are generally taxable.
- Income depends on premium, age, start date, coverage type, and insurer pricing.
- You gain longevity protection but give up liquidity and face inflation and insurer risk.
What Is a QLAC and How Does It Work?
A QLAC is a deferred annuity that meets specific IRS requirements. Unlike a general deferred annuity, it must begin paying no later than the first day of the month after your 85th birthday. It also can't offer cash surrender or commutation rights once payments are due to start, apart from a limited 90-day rescission window.
Eligible Accounts and Limits
IRS instructions list these funding sources:
- Traditional IRAs
- 401(a) qualified plans
- 403(a) and 403(b) plans
- Eligible governmental 457(b) plans
Roth IRAs are expressly excluded. Inherited accounts and designated Roth 401(k) balances sit in a gray area under IRS rules, so confirm eligibility with your plan administrator.
The premium limit is $210,000 for 2026, according to IRS Notice 2025-67. SECURE 2.0 repealed the former 25% account-balance cap for contracts purchased on or after December 29, 2022. Limits are indexed, so check the current figure before buying.
The Purchase Process
- Transfer eligible funds directly from your IRA or plan to the insurer.
- Pick an income start date (no later than the month after age 85).
- Choose single-life or joint-life coverage.
- Review return-of-premium and beneficiary provisions.
The insurer files Form 1098-Q and sends you an annual statement.
How RMDs Are Treated
Before payments begin, the QLAC value is excluded from the account balance used to calculate RMDs. That is a timing rule. It doesn't make the income tax-free or prove lower lifetime taxes. RMDs start at age 73 for people born 1951 to 1958 and age 75 for those born in 1960 or later.
A Hypothetical Example
This is an illustration, not a forecast or recommendation.
Suppose a 65-year-old couple has a $900,000 traditional IRA, Social Security, and a taxable brokerage account. They move $150,000 of the IRA into a QLAC with income starting at 85.
Social Security, the taxable account, and the remaining $750,000 fund their expenses through their 80s. The QLAC is a backstop for the years when those other sources could be stretched.
QLAC Benefits, Tax Rules, and Income Planning
Longevity Protection and Portfolio Balance
The core benefit is a predictable lifetime income stream that begins when other assets may be depleted. Guaranteed income can cover future essential expenses, which frees the rest of the portfolio for near-term spending, growth, liquidity, or legacy goals. It complements a diversified portfolio rather than replacing it.
A 2015 SOA/Stanford study modeled a 15% QLAC allocation with income at 85. It found higher expected average income at a similar risk level, but warned of possible income gaps around ages 84 to 85. That 15% was a study assumption, not a recommendation.
Managing Taxable Income
Excluding the QLAC portion from RMD calculations may lower your taxable income in your 70s and early 80s. That can matter for:
- Tax bracket management
- Medicare IRMAA surcharges (2026 thresholds: $109,000 of modified adjusted gross income for individuals and $218,000 for joint filers)
- Timing of withdrawals and charitable giving
Results depend on your tax situation. Payments also add taxable income later, so a QLAC shifts income rather than erasing it.
Payout Design Choices
- Single vs. joint life: Joint coverage lowers initial income but protects a surviving spouse. A spouse who is sole beneficiary can receive up to 100% of the original payment.
- Later start date: Delaying the first payment raises income per dollar of premium.
- Return of premium: Beneficiaries receive any unused premium if you die early, usually in exchange for lower lifetime payments.
- Cost-of-living adjustments: Rules permit certain increases, though not every insurer offers them. Protection against inflation generally costs more.
Taxes When Payments Begin
Payments from pre-tax money are taxable as ordinary income, per IRS Publication 575. Coordinate with a qualified tax professional before buying.
QLAC Costs, Rates, Payout Options, Risks, and Alternatives
What Drives Cost
A QLAC costs less than an immediate annuity for the same income because it covers a shorter payment period. A 2022 American Academy of Actuaries review also notes that insurer costs and profit are built into pricing. Factors include:
- Amount transferred and your age
- Income start date and life expectancy assumptions
- Single or joint coverage
- Riders such as return of premium or COLA
- Commissions and contract charges
Insurance agents are typically commission-based, paid upfront or as an annual trailing percentage. Ask for full compensation disclosure.
Rates and Estimating Income
Rates change frequently, so any figure without a date, carrier, and assumptions is unreliable. Some online calculators show "up to" payouts without disclosing start age, payout form, or COLA. Don't treat those as benchmarks.
To compare fairly, request illustrations from several insurers. Hold premium, ages, start date, payment frequency, survivor terms, inflation features, and death benefit constant in every quote.
QLAC vs. SPIA
| Feature | QLAC | SPIA |
|---|---|---|
| Income start | Deferred, by age 85 | Within one year |
| Funding | Eligible retirement accounts | Often after-tax or retirement money |
| RMD treatment | Excluded until payments start | No special exclusion |
| Liquidity | Very limited | Very limited |
| Typical purpose | Late-life income gap | Immediate income |
Principal Risks
- Illiquidity: You can't cash out once the contract is set.
- Inflation: Fixed payments lose buying power. CPI inflation hit 8.0% in 2022, per BLS data.
- Early death: Without a return-of-premium feature, heirs may receive little.
- Opportunity cost: The money can't pursue other investments.
- Insurer risk: Guarantees depend on the insurer's claims-paying ability; check AM Best or S&P ratings. State guaranty coverage is typically about $250,000 and varies by state.
Alternatives and Complements
- Delaying Social Security, which adds about 8% per year until age 70
- Bond or CD ladders for scheduled, relatively liquid income
- Portfolio withdrawals under a planned spending rate
- Pensions or other deferred income annuities
Other deferred annuities often carry surrender charges for five to seven years, and withdrawals before age 59½ may trigger a 10% penalty. Match the mix to your income needs and risk tolerance.
Who Might Benefit From a QLAC?
A Potential Fit
- Sufficient liquid assets and near-term income to cover spending before payments begin
- A meaningful pre-tax retirement balance to fund the premium
- Little need to tap the committed funds during the deferral
- Concern about outliving savings in later retirement
Situations Calling for Caution
- Need for emergency access to the deferred amount
- Poor health or a shorter planning horizon
- Too few assets outside the QLAC
- Strong legacy priorities that favor a larger estate
- Discomfort with insurer risk
Evaluation Checklist
- Essential expenses and existing guaranteed income
- RMD projections and tax bracket
- Healthcare and long-term-care reserves
- Spouse coverage and beneficiary goals
- Inflation assumptions
- Insurer strength, fees, and surrender provisions
Weigh these points against your full retirement picture before you lock in a premium.
Lewis & Associates Capital Advisors, LLC is a registered investment adviser in North Carolina that provides fiduciary, commission-free advisory services. Its fiduciary duty applies to investment advice, not to insurance sales.
The firm can review how a QLAC would fit alongside your investments, withdrawals, and goals. A review doesn't mean a specific QLAC is recommended or available.
The Bottom Line
A QLAC is a specialized longevity tool for a specific job: funding a future income need that may be hard to cover otherwise.
Before an irrevocable decision, compare these factors against your liquidity needs:
- Contract terms, costs, and guarantees
- Inflation protection and beneficiary options
- Insurer strength and tax consequences
Consult an investment adviser and a tax professional. Ask any adviser about licenses, registration, compensation, disciplinary history, and Form ADV.
Frequently Asked Questions
How much does a QLAC cost?
Cost depends on your premium, age, income start date, single or joint coverage, optional benefits, insurer pricing, and contract charges. Request current illustrations and read the disclosures.
At what age should you buy a QLAC?
No universal best age exists. Timing depends on RMD planning, desired start date, liquidity, health, and current IRS rules.
What are the current QLAC annuity rates?
Rates vary by insurer and contract assumptions. Use dated quotes that state the premium, ages, start date, coverage type, and features.
What is the difference between a QLAC and a SPIA?
A SPIA starts paying within a year, while a QLAC defers income up to age 85. They differ in funding, RMD treatment, and planning purpose.
Is a QLAC a good investment?
A QLAC is mainly insurance and income planning, not a growth investment. Suitability depends on longevity risk, cash flow, taxes, liquidity, and alternatives.
What are the benefits of a QLAC?
Benefits include guaranteed later-life income, potential RMD management, and shielding the committed funds from market swings. Weigh these against illiquidity, inflation, death-benefit limits, and insurer strength.
