Regulations for a Qualified Longevity Annuity Contract

A Qualified Longevity Annuity Contract, or QLAC, is a deferred annuity funded with assets from a retirement account. Its main function is to create a guaranteed stream of income that begins late in life, helping to address the financial risk of living longer than expected. This type of annuity is defined and governed by specific regulations from the U.S. Treasury and the Internal Revenue Service (IRS).

These federal regulations are what grant the QLAC its “qualified” status, allowing for favorable tax treatment within certain retirement savings plans. The rules permit a portion of retirement funds to be used for purchasing the annuity, which then provides a predictable income later on. This structure is intended to encourage individuals to plan for income security in their advanced years.

Core Qualification Requirements

To be designated as a QLAC, an annuity contract must be purchased with funds from specific types of retirement accounts. The regulations permit the use of assets from most defined contribution plans, including traditional Individual Retirement Accounts (IRAs), 401(k)s, 403(b)s, and eligible governmental 457(b) plans. This allows for a direct, tax-free transfer of funds from these existing retirement plans to an insurance company to purchase the QLAC.

Conversely, certain accounts are not eligible for purchasing a QLAC. Funds held in a Roth IRA cannot be used, primarily because Roth IRAs are not subject to the same required minimum distribution rules that apply to traditional accounts. Similarly, defined benefit pension plans are not eligible sources for funding a QLAC.

Beyond the funding source, the annuity contract itself must adhere to strict structural requirements set by the IRS. A rule is that the contract cannot have a cash surrender value, meaning the owner cannot simply liquidate the contract for a lump sum after purchase. Likewise, the regulations prohibit commutation rights, which would allow the owner to receive the present value of future payments as a lump sum.

The contract must also provide for fixed, not variable, payments. This means the income stream cannot be tied to the performance of underlying investments like stocks or equity indexes. The purpose of this requirement is to ensure the income from the QLAC is predictable and guaranteed, aligning with its core function of providing reliable income security late in life.

Investment and Premium Limitations

The regulations governing how much money can be invested into a QLAC have undergone significant changes, making the product more accessible. Historically, the amount an individual could use to purchase a QLAC was subject to a two-part test. An individual could invest the lesser of 25% of their qualified retirement account balances or a specific dollar amount, which was originally $125,000 and subject to inflation adjustments.

This dual limitation often restricted the utility of a QLAC, particularly for individuals with large account balances who were still capped by the dollar limit, or for those with smaller balances constrained by the percentage rule. The 25% limit was applied to each employer plan separately but was aggregated for IRAs.

A major shift in these rules came with the SECURE 2.0 Act of 2022, which repealed the 25% account balance limitation. This change simplifies the decision-making process, as individuals no longer need to calculate a quarter of their total retirement assets to determine their maximum allowable premium. The investment decision is now governed solely by a dollar-based ceiling.

The SECURE 2.0 Act also significantly increased the dollar limit for QLAC premiums to $200,000. An individual who previously invested $125,000 under the old rules can now add more funds to their existing QLAC, up to the new $200,000 cap, without needing to exchange the contract. This higher limit allows for a more substantial portion of retirement assets to be allocated toward securing future income.

Furthermore, the new $200,000 dollar limit is indexed for inflation, meaning it will increase over time to maintain its purchasing power. For 2025, the inflation-adjusted limit is $210,000. This indexing ensures that the utility of the QLAC as a retirement planning tool is not eroded by rising costs of living over the long term.

Payout and Distribution Rules

The regulations for QLACs provide specific rules for when and how income payments must be made to the annuitant. Federal rules mandate that distributions from a QLAC must begin no later than the first day of the month immediately following the annuitant’s 85th birthday. While the contract must specify this ultimate start date, it can permit the owner to elect an earlier date to begin receiving payments.

When payments do commence, they must be structured in a permissible format. The most common options are a single life annuity, which provides payments for the life of the annuitant, or a joint and survivor annuity, which continues to make payments to a surviving spouse. Payment options like a “period certain,” which guarantees payments for a fixed number of years, are not allowed.

The rules also address what happens if the annuitant dies before receiving the full value of their initial investment. To address this concern, QLACs are permitted to include a “return of premium” (ROP) death benefit. This feature ensures that if the annuitant dies before the annuity starting date, a designated beneficiary will receive an amount equal to the premiums paid into the contract.

If the annuitant dies after payments have begun, the ROP benefit would pay the beneficiary the difference between the total premiums paid and the annuity payments already received. This death benefit must be paid out by the end of the calendar year following the year in which the annuitant dies. This provision offers a level of principal protection, making the contract more appealing to individuals concerned about losing their investment if they pass away prematurely.

Interaction with Required Minimum Distributions (RMDs)

A significant regulatory benefit of a QLAC is its direct impact on the calculation of Required Minimum Distributions (RMDs). The amount of money used to purchase a QLAC is excluded from the retirement account balance that is used to determine the owner’s annual RMD.

The practical effect of this rule is a reduction in the account owner’s taxable income during the deferral period. For example, consider an individual with a $1,000,000 traditional IRA who uses $200,000 to purchase a QLAC. For RMD calculation purposes, their IRA balance is now treated as $800,000, which results in a smaller mandatory withdrawal each year and lowers their immediate income tax liability.

This favorable treatment lasts until the QLAC itself begins making payments. Once the annuity starting date is reached, the income payments received from the QLAC are fully taxable as ordinary income. At that point, the distributions from the annuity become part of the individual’s taxable income for the year.

This interaction is designed to provide a specific form of tax deferral. It allows a portion of retirement assets to remain tax-deferred beyond the standard RMD start age, in exchange for converting those assets into a guaranteed lifetime income stream later in life.