What Is a QLAC Account and How Does It Work?

Qualified Longevity Annuity Contracts (QLACs) are a financial instrument designed to address a common concern among retirees: outliving their savings. A QLAC is a deferred income annuity that converts a portion of retirement assets into a guaranteed income stream, beginning later in life. This provides a financial safety net, securing a reliable income source for later years.

What is a QLAC?

A QLAC is a deferred annuity purchased with funds from a qualified retirement plan or an Individual Retirement Account (IRA). It provides guaranteed monthly payments that begin at a predetermined future date, often when the annuitant reaches an advanced age, such as 80 or 85. This contract helps ensure a steady income stream for life, mitigating the risk of depleting retirement savings.

The primary purpose of a QLAC is to offer longevity protection, safeguarding retirees against the financial strain of an extended lifespan. By allocating a portion of retirement savings to a QLAC, individuals can secure income that will continue for as long as they live, even if other assets are exhausted. This is valuable in an era of increasing life expectancies, where traditional retirement savings might not stretch across many decades.

A QLAC is distinct from other annuity products due to its specific Internal Revenue Service (IRS) approved features. Unlike an immediate annuity, a QLAC involves a significant deferral period before income payments begin. This deferral period allows invested funds to grow, potentially leading to larger future payouts.

The “qualified” designation means the annuity adheres to government requirements, enabling special tax treatment when funded with retirement account money. This includes the ability to defer Required Minimum Distributions (RMDs) from traditional IRAs and 401(k)s, an advantage for tax planning. The QLAC was introduced in 2014 by the U.S. Treasury Department.

How QLACs Operate

Funds used to purchase a QLAC originate from qualified retirement accounts, including traditional IRAs, 401(k) plans, 403(b) plans, and eligible governmental 457(b) plans. Roth IRAs and inherited IRAs generally cannot be used to fund a QLAC.

The process begins with purchasing a QLAC from an insurance company, either through a single lump-sum premium or a series of premiums. At purchase, the annuitant selects a future date for income payments to begin, known as the annuitization date. This income start date can be chosen to align with specific retirement planning needs, though it must adhere to IRS-mandated age limits.

During the deferral period, the funds invested in the QLAC grow on a tax-deferred basis, without being subject to market fluctuations. The longer the deferral period, the higher the projected income payments typically become. This growth mechanism allows for a larger guaranteed income stream when payments eventually begin.

QLACs offer various payout options, allowing individuals to customize their future income. Common options include single life, which provides payments for the annuitant’s lifetime, and joint life, which extends payments for the lives of both the annuitant and a spouse. Some QLACs also offer a cash refund feature, ensuring that if the annuitant dies before receiving payments equal to the premium paid, the remaining balance is returned to beneficiaries.

Key QLAC Rules

QLACs are subject to specific IRS regulations and limitations that govern their use and tax benefits. One rule concerns the maximum premium amount that can be allocated to a QLAC. Under the SECURE 2.0 Act of 2022, the dollar limit for QLAC premiums was increased to $200,000, with this amount subject to annual inflation adjustments. For 2025, the limit is $210,000.

A key benefit of QLACs is their impact on Required Minimum Distributions (RMDs). The amount invested in a QLAC is excluded from RMD calculations until income payments begin, which can significantly lower an individual’s taxable income during the deferral period. This exclusion provides a valuable tax planning strategy, allowing more of the retirement balance to remain tax-deferred for a longer duration.

There are also strict age restrictions for when QLAC income payments must commence. Payments cannot begin later than age 85. While individuals can choose an earlier start date, this maximum age ensures that funds are eventually distributed, aligning with the intent of tax-advantaged retirement accounts.

It is important to understand that while the QLAC premium is excluded from RMD calculations, the QLAC itself is not subject to RMDs until the income payments actually start. Once payments begin, they become taxable as ordinary income.