As life expectancies rise, many retirees worry about outliving their savings, a risk known as longevity risk. A Qualified Longevity Annuity Contract (QLAC) offers a targeted solution: it provides guaranteed lifetime income starting later in retirement while delivering valuable tax advantages through required minimum distribution (RMD) relief.
If you’re exploring retirement income strategies, understanding QLACs can help you decide whether this tool fits your plan. Let’s break down what a QLAC is, how it works, current rules, and the key pros and cons.
What Is a Qualified Longevity Annuity Contract (QLAC)?
A QLAC is a special type of deferred income annuity purchased with pre-tax dollars from a qualified retirement account, such as a traditional IRA, 401(k), 403(b), or similar plan. Unlike immediate annuities that start payments right away, a QLAC defers payouts to a future date you select, up to age 85.
The “qualified” designation comes from IRS rules that allow the premium amount to be excluded from your RMD calculations until payments begin. This makes QLACs unique among annuities for tax-deferred retirement accounts.
QLACs are backed by the issuing insurance company’s financial strength and are designed primarily as longevity insurance, ensuring you have income even if you live well into your 90s or beyond.
How Does a QLAC Work?
- Funding: You transfer up to the IRS limit from your qualified retirement account to purchase the QLAC.
- Deferral Period: The money grows tax-deferred inside the contract. You choose when payments start (typically between your mid-70s and age 85).
- Payouts: Once payments begin, you receive guaranteed monthly (or other frequency) income for life. Options often include single-life or joint-and-survivor (for a spouse).
- RMD Treatment: The QLAC premium is removed from the account balance used to calculate RMDs, lowering your taxable withdrawals in the early years of retirement.
Payments are taxed as ordinary income when received. Some contracts offer a return-of-premium death benefit (if you die before receiving full value), though this usually reduces payout amounts.
Current QLAC Rules and Limits (2026)
- Premium Limit: Up to $210,000 per person (lifetime limit across all qualified accounts). This is adjusted for inflation and applies individually, so a couple can contribute up to $420,000 combined.
- Maximum Start Age: Payments must begin no later than age 85.
- Eligible Accounts: Traditional IRAs, 401(k)s, etc. Roth IRAs and inherited IRAs generally do not qualify.
- Contract Requirements: Must meet specific IRS criteria (fixed or certain fixed annuities; no variable or indexed annuities qualify for QLAC status). The issuer certifies it via IRS Form 1098-Q.
These rules were simplified and expanded by the SECURE 2.0 Act, removing the old 25% of account balance cap.
Pros of QLACs
- Guaranteed Lifetime Income: Provides a personal pension-like stream that you cannot outlive, helping protect against longevity risk and covering late-retirement expenses like healthcare.
- RMD Reduction and Tax Deferral: Lowers your taxable RMDs in your 70s and early 80s, potentially keeping you in a lower tax bracket, reducing Medicare premiums, and giving more time for tax-efficient strategies like Roth conversions.
- Simplicity and Security: Fixed payments, no market volatility exposure during the payout phase, and spousal protection options.
- Estate Planning Features: Return-of-premium options can return unused funds to heirs.
Cons of QLACs
- Illiquidity: Once purchased, the money is locked in with no access to principal or early withdrawals. It’s irreversible.
- Inflation Risk: Most payouts are fixed and do not automatically adjust for inflation, so purchasing power may decline over time (inflation riders reduce initial payments).
- Opportunity Cost: Funds miss potential market growth. If you die early (especially without a return-of-premium rider), heirs may receive less or nothing.
- Limited Amount: The $210,000 cap may not meaningfully impact RMDs for very large retirement accounts.
- Mortality Credit Trade-off: Higher payouts assume some participants won’t live long enough to collect fully.
Who Should Consider a QLAC?
QLACs can theoretically suit healthy individuals or couples with moderate-to-substantial retirement savings ($500K–$1.5M+ in qualified accounts) who want longevity protection and don’t need immediate liquidity. They can work as part of a broader strategy that includes Social Security, other investments, and diversified income sources.
They may not fit if you have significant health concerns, need flexible access to funds, prioritize growth on your investments, or have smaller accounts where the cap limits impact.
Is a QLAC Right for You?
A QLAC can be a tool for retirement income planning, combining RMD relief with guaranteed late-life income. However, it involves trade-offs in liquidity and flexibility. In most cases, our view is they are not suitable. But like any investment vehicle, there can be some specific circumstances where they play a valuable role.
Consult your financial advisor and tax professional to model if a QLAC fits your specific situation, including quotes from multiple carriers for the best rates.
About the Author
Joseph M. Favorito, CFP® is a Certified Financial Planner® as well as the founder and managing partner at Landmark Wealth Management, LLC, a fee-only SEC registered investment advisory firm. He specializes in helping individuals and families develop comprehensive financial strategies to achieve their long-term goals.