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Are you entering retirement, but want to delay taking the full required minimum distributions (RMDs) from your retirement portfolio? Perhaps use that money to help secure the possibility of a long retirement instead? Meet the QLAC.
“There are rules and regulations in place that sometimes force dollars out of retirement accounts in a way that does not perfectly align with the growing longevity of today’s Americans,” said J. Todd Gentry, a financial professional with Synergy Wealth Solutions in Chesterfield, Missouri. “The QLAC helps address that longevity misalignment.”
QLAC definition
QLAC stands for qualified longevity annuity contract. It’s a type of annuity that can be bought with money from qualified retirement accounts. And it provides a way to delay required minimum distributions and their associated taxes from the portion of the money used to buy this type of annuity. Yet at the same time, it helps build a plan for longevity risk — the possibility of outliving your savings.
“It is not uncommon to see people working into their 70s, so it sometimes makes sense to defer those retirement distributions until later years — especially if the client expects longevity, or doesn’t necessarily need the money right away,” said Reed Willett, a vice president and investment specialist with Coastal Wealth, a MassMutual firm in Fort Lauderdale, Florida. “It certainly is nice to have that option available.”
There are advantages and disadvantages to QLACs, however. Many people opt to discuss them with a financial professional before deciding whether a QLAC belongs in their retirement plan.
Connect with a MassMutual financial professional
To begin a discussion and fully appreciate the possible benefits of a QLAC, you first have to understand the rules for withdrawing retirement funds.
Required minimum distribution (RMD) rules defined
When someone reaches age 73, they are required to start withdrawing money from their tax-deferred retirement accounts every year. And they have to take the money whether they need it or not. (Related: Turning 73? Required minimum distributions explained)
These withdrawal requirements cover all employer-sponsored retirement plans, including 401(k), 403(b), and 457(b) plans, as well as traditional IRAs and IRA-based plans, such as SEP IRAs, SIMPLE IRAs, and SARSEPs (Roth accounts are not subject to RMDs). (Related: What is a qualified retirement account?)
These kinds of accounts are funded with pretax dollars and any earnings grow on a tax-deferred basis. But withdrawals are taxed. That’s why the government sets an age when withdrawals must be made — it has to collect taxes at some point in order to generate funds for the federal budget.
But RMDs can present a challenge in planning for longevity and associated expenses, particularly increased health care costs.
Essentially, retirees must balance RMD requirements against their expected retirement income needs.
Deferring a portion of qualified retirement funds adds some flexibility into achieving that balance.
“A QLAC is a great way for someone to defer a portion of their required minimum distribution from IRA assets to a later date,” said Willett.
Annuities and the QLAC advantage
Annuities are a useful way to help plan for a long retirement and the risk of outliving your funds. With an annuity contract, in exchange for a payment or a series of payments over time, an insurance company will provide a guaranteed stream of income at some specific point in the future.1
Essentially, a QLAC is a specific form of a deferred annuity that can be purchased with retirement funds. Those retirement funds are removed from RMD requirements and their associated taxes deferred.
There are limits, though. The QLAC deferral can only last up to age 85. By that time, you must start receiving payment streams from the QLAC. And only $210,000 of your qualified retirement accounts can be used to fund the QLAC in 2026 — a limit indexed for inflation and subject to annual IRS adjustment. (Previously, only the lesser of 25 percent of the aggregate account balance or $145,000 of your qualified retirement funds could be used to fund a QLAC, but recent legislation changed those limits.)
Additionally, married couples can each fund a QLAC, potentially shielding up to $420,000 in combined retirement assets from RMD calculations — and contracts can be structured with joint and survivor benefits.
How a QLAC defers your RMDs
Deferring a portion of qualified retirement funds from RMDs allows for more flexibility in planning for things like long-term care needs, financial professionals point out.
“Many people enter a nursing home in their early 80s, which happens to align with the distribution age and start date for the QLAC,” said Gentry. “So, by using the QLAC, you’re taking qualified dollars and allowing them to continue to grow tax deferred until your early 80s. Then, if nursing home expenses are being incurred after age 80, those would be medical expenses and, at least under current tax law, tax deductible. You’d be funding tax-deductible long-term care expenses with tax-deferred dollars. This is effective planning.”
QLAC disadvantages
But there can be drawbacks. To start with, opting for a QLAC locks up a portion of your retirement funds, which could pose a challenge if something unexpected happens. And, depending on the macro investment environment, those funds may not be earning enough to keep up with inflation.
Also, it is important to note that not all annuities qualify as QLACs. And QLAC annuities must meet certain IRS criteria. A deferred income annuity must be designated as a QLAC at the time the contract is purchased; you can’t convert an existing deferred income annuity into a QLAC after a contract has been issued. One exception: as of September 2024, IRS regulations do allow an existing QLAC to be exchanged for a new QLAC contract, provided the $210,000 lifetime premium cap is not exceeded.
Many people turn to a financial professional to help navigate the requirements, identify what companies sell QLACs. and learn how a QLAC can possibly fit into their retirement plan. (Need a financial professional? Find one here)
The primary reason to choose a QLAC is to secure a guaranteed income stream for later years, especially if longevity is a concern. For the right person, a QLAC can provide a guaranteed income solution at a later age that may also help them manage the tax liability associated with RMDs.
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Frequently Asked Questions about QLACs
Q. What is a QLAC and how does it work?
A. A qualified longevity annuity contract (QLAC) is a type of deferred annuity purchased with money from qualified retirement accounts, such as a traditional IRA or 401(k). It lets you defer required minimum distributions — and associated taxes — on the portion of funds used to buy it, while guaranteeing an income stream that begins at a future date you choose, no later than age 85.
Q. What are the main disadvantages of a QLAC?
A. The primary downside is illiquidity — funds placed in a QLAC are generally locked in, which can be a problem if unexpected expenses arise. Most standard QLACs also pay a fixed nominal amount, meaning inflation over a long deferral period can erode their real purchasing power. A financial professional can help you weigh these trade-offs. (Related: Does an annuity fit your retirement goals?)
Q. How does a QLAC differ from other annuities?
A. Not all annuities qualify as QLACs. A QLAC must meet specific IRS criteria, be purchased with qualified retirement funds, and be designated as a QLAC at the time of purchase. The key distinction from a general deferred income annuity is that QLAC funds are excluded from your account balance when RMDs are calculated — reducing your required withdrawals in early retirement.
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This article was originally published in July 2021. It has been updated.
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