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QLACs: deferred income from retirement money, with the rules attached

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Income that starts later, bought with retirement money, under rules Congress wrote for it

A qualified longevity annuity contract, or QLAC, is a deferred income annuity bought with money from an IRA or an employer retirement plan. You deposit a sum now, and the insurer pays a fixed monthly income for life starting at an age you choose, which can be as late as 85. Because the income is deferred, the payout per dollar is much higher than an immediate annuity's; because the money is inside a QLAC, the IRS lets you exclude it from required minimum distribution calculations until the income starts. Those two features are the whole case for a QLAC. The case against it is that the money is locked until the income date, the payment is fixed, and if you die before the income starts, what your beneficiary receives depends entirely on the option you chose. This page explains the rules, the trade-offs and the fit.

Next Wave Options is an independent, insurance-licensed agency in Salinas appointed with carriers that issue QLACs. We place them rarely, for a specific purpose, and we show the alternatives every time.

The rules that make a QLAC a QLAC

  • It is bought with retirement money. A traditional IRA, a 401(k), a 403(b) or a governmental 457(b) can hold one; a Roth IRA generally has no reason to, because Roth IRAs have no lifetime required minimum distributions.
  • There is a dollar limit on the total premiums you may put into QLACs, set by federal law and indexed annually by the IRS. We do not print the figure on this page because it changes; the current year's limit is published in the IRS's annual cost-of-living notice, summarized on the IRS dollar limitations page, and we quote it, with its year, in writing before any purchase.
  • Income must start by a set age, the first day of the month after you turn 85 at the latest, and payments are fixed once they begin.
  • It must be a fixed contract. Variable and indexed features are not allowed in a QLAC, and it cannot offer a cash surrender value.
  • The QLAC premium is excluded from RMD calculations for the account it came from until income begins, which is the tax feature people buy it for.

The IRS's required minimum distributions page covers the RMD rules the QLAC interacts with; the mechanics for your own accounts belong with a tax professional.

What deferral buys, and what it costs

Deferring income to 80 or 85 lets the insurer promise a much larger monthly payment per dollar than a contract that starts paying now, because the deferral period and mortality both work in the insurer's favor. That makes a QLAC an efficient way to insure the one risk that a conventional retirement plan handles worst: living far longer than expected. The cost is that the money is gone from your accessible savings from the day you buy, the payment does not rise with inflation unless you buy an inflation option at a lower starting payment, and if you die before the income date without a return-of-premium option, the beneficiary receives nothing. Most contracts offer a return-of-premium death benefit that pays the unrecovered premium to a beneficiary; it lowers the income, and for most buyers it is worth choosing.

Who a QLAC fits

  • Someone in good health with a family history of long life, who has done the income worksheet and wants the years past 80 or 85 covered regardless of what markets do.
  • Someone whose required minimum distributions would otherwise exceed what they need to spend, and who would rather defer part of that taxable income to later years, with a tax professional's agreement that it helps.
  • Someone with enough other savings that locking up the QLAC premium for a decade or two creates no hardship.

It does not fit someone in poor health, someone who may need the money, anyone without a comfortable margin above the QLAC premium, or as a home for a large share of a retirement balance. For income now, an immediate income annuity is the right contract; for a fixed rate with the money still yours, a MYGA; the annuities overview compares them all.

Questions to ask before buying a QLAC

  1. What is this year's IRS dollar limit, in writing, and how much of it have I already used in other QLACs?
  2. What is the monthly payment at the income age I am considering, with and without a return-of-premium death benefit, and with a joint-and-survivor option for a spouse?
  3. What is the carrier's AM Best rating? A promise that starts paying in 15 years needs an insurer that will be there in 15 years; ratings are on our carriers page.
  4. What does the same money look like left in the IRA, or used to delay Social Security, side by side?
  5. Has my tax professional confirmed the RMD effect for my accounts?

Buying a QLAC with retirement money is a rollover-related recommendation covered by California's best-interest standard and the federal Department of Labor's PTE 2020-02; we document the reason and the alternatives in writing. Because a QLAC is irreversible and illiquid, we will not place one on a first conversation.

Questions people ask about QLACs

A qualified longevity annuity contract: a fixed deferred income annuity bought with IRA or employer-plan money, up to an IRS dollar limit, that pays a lifetime income starting at an age you choose, no later than 85, and is excluded from required minimum distribution calculations until income begins.

Federal law sets a dollar limit on total QLAC premiums, indexed annually by the IRS. We do not print the figure because it changes each year; we quote the current limit, with its year, in writing before any purchase, from the IRS's annual dollar-limitations notice.

The QLAC premium is excluded from the account balance used to calculate RMDs until the QLAC income starts, which lowers RMDs in the meantime. Once income begins, the payments are taxable. A tax professional should confirm the effect for your accounts.

It depends on the option chosen. Without a return-of-premium death benefit, nothing is paid. With one, the unrecovered premium goes to your beneficiary. Most buyers should choose the death benefit despite the lower income.

For a healthy person with enough other savings who wants the years past 80 or 85 covered regardless of markets, and who would benefit from deferring part of their RMDs, it can be. It is a poor idea for anyone who may need the money, is in poor health, or is being asked to commit a large share of a balance.

No. A QLAC must be a fixed contract; indexed and variable features are not permitted, and it cannot have a cash surrender value. That simplicity is part of the design.

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Reviewed by Roberto Morales, California Insurance License #0G97165. Next Wave Options is licensed for life and annuity products only and does not provide investment, tax or legal advice.