QLAC Rules on Contributions and RMDs

A Qualified Longevity Annuity Contract (QLAC) is a type of deferred annuity purchased using funds from a retirement account. It is designed to provide a guaranteed stream of income that begins later in life. This helps to ensure you do not outlive your savings by creating a personal pension that starts at an advanced age.

A QLAC allows a portion of your retirement savings to grow tax-deferred outside of the standard rules governing most retirement accounts. By allocating funds to a QLAC, you set aside a portion of your savings to create a reliable income source for your later years. The main appeal of this arrangement is its interaction with tax regulations for retirement fund withdrawals.

Qualifying for a QLAC and Contribution Limits

To purchase a QLAC, funds must come from qualifying retirement accounts, and the transfer is a non-taxable event. Funds held within a Roth IRA are not eligible for purchasing a QLAC. Eligible accounts include:

• Traditional Individual Retirement Arrangements (IRAs)
• 401(k) plans
• 403(b) plans
• Governmental 457(b) plans

The amount you can invest in a QLAC is governed by a lifetime limit, adjusted annually for inflation. For 2025, an individual can contribute a maximum of $210,000. This limit was simplified by the SECURE 2.0 Act, which eliminated a previous rule that capped contributions at 25% of qualifying retirement account balances.

This $210,000 is a lifetime limit per person and is aggregated across all of an individual’s retirement accounts. For example, the total amount used to purchase QLACs from multiple IRAs and a 401(k) cannot exceed the cap. A married couple could each invest up to the maximum into separate QLACs if they have sufficient retirement funds.

Required Features of a QLAC Annuity

For an annuity to be designated as a QLAC, it must adhere to specific contractual requirements. A primary rule is that the contract must stipulate that payments will begin no later than the first day of the month following the annuitant’s 85th birthday. This feature ensures the annuity provides income during advanced ages.

The contract is also subject to restrictions on liquidity. A QLAC cannot offer a commutation feature or a cash surrender value. This means you cannot request a lump-sum payout or surrender the contract for its cash value after the purchase is complete. This lack of liquidity is a trade-off for the tax benefits the QLAC provides, reinforcing its role as a long-term income source.

QLACs are permitted to offer certain benefits. A spousal survivor benefit allows payments to continue to a surviving spouse. Another option is a return-of-premium death benefit, which guarantees that if an annuitant dies before payments received equal the premium paid, their beneficiaries receive the difference.

Interaction with Required Minimum Distributions

An advantage of a QLAC is its impact on Required Minimum Distributions (RMDs). The amount used to purchase the QLAC is excluded from the retirement account balance when calculating annual RMDs. This reduces the amount you must withdraw from tax-deferred accounts each year, lowering your taxable income during those years.

For example, an individual with a $1,000,000 traditional IRA who uses $210,000 to purchase a QLAC will have future RMD calculations based on the remaining $790,000 balance. This exclusion remains in effect until the QLAC begins to make payments.

Once the annuity’s payment start date is reached, the income stream is fully taxable as ordinary income. These distributions from the QLAC satisfy the RMD requirements for the funds held within the annuity. The owner must still take RMDs from their other retirement accounts, such as the remaining balance in their IRA or 401(k).

This structure allows retirees to manage their tax liability by deferring income on a portion of their assets until a later age. At that time, their overall income and tax bracket may be lower.

Special Considerations and Corrections

If an individual accidentally contributes more than the allowable limit to a QLAC, the error can be corrected without disqualifying the contract. The excess amount, along with any earnings, must be returned to the original retirement account. This must be done by the end of the calendar year following the year the contribution was made.

In the event of a divorce, a QLAC can be divided between spouses without violating the contract rules. This is typically accomplished through a qualified domestic relations order (QDRO). For some plans not subject to QDRO rules, like governmental plans, a divorce decree may be sufficient, allowing the asset to be divided as marital property.

To ensure compliance, the company that issues the QLAC and the custodian of the IRA have annual reporting duties. They must provide information to both the IRS and the account owner. This reporting helps track the amounts invested in QLACs and verifies that contributions and contract features adhere to federal tax law.