What Is a QLAC Annuity and How Does It Work?

A Qualified Longevity Annuity Contract (QLAC) is a specialized deferred income annuity. It provides guaranteed income later in life, addressing longevity risk. QLACs comply with Internal Revenue Service (IRS) regulations, allowing individuals to use qualified retirement savings to secure future income. Its primary aim is to offer a predictable income stream that begins at an advanced age, enhancing financial security during later retirement.

Defining a QLAC Annuity

A QLAC is a deferred income annuity that provides a guaranteed stream of income beginning at a future date. This financial product is designed to address longevity risk, which is the possibility of outliving one’s financial resources. Funds used to purchase a QLAC typically come from qualified retirement accounts, such as 401(k)s, 403(b)s, or Individual Retirement Accounts (IRAs).

QLACs adhere to specific IRS rules, allowing for unique tax treatment. It is a contract where a lump sum or premiums are paid to an insurance company, and the annuitant receives regular payments starting at a predetermined future date. A QLAC ensures a steady income flow that complements other retirement income sources, providing a financial safety net for very late retirement years.

Operational Mechanics of a QLAC

A QLAC converts qualified retirement savings into a future income stream. This involves a premium payment from a retirement account to an insurance company. This payment initiates a deferral period between the purchase and income payments. During this phase, funds grow tax-deferred.

Once the income start date arrives, the QLAC enters its payout phase, and the insurance company begins providing guaranteed monthly payments. Common payout options include a single life annuity, which provides income for the lifetime of one individual, or a joint life annuity, which continues payments for as long as either the annuitant or their spouse is alive. Some QLACs may also offer a cash refund feature, which ensures that if the annuitant dies before receiving payments equal to the premium paid, the remaining balance is returned to beneficiaries. The future payment amount is determined at purchase.

IRS Regulations for QLACs

To qualify as a QLAC, an annuity must adhere to IRS regulations. These rules cover the maximum premium amount and the latest permissible age for income commencement. As of 2025, the maximum aggregate amount that can be allocated to a QLAC from all qualified retirement accounts is $210,000 per person. This is a lifetime cap, adjusted annually for inflation. The SECURE 2.0 Act of 2022 eliminated the previous rule that limited QLAC premiums to 25% of an individual’s account balance, simplifying the contribution process.

A benefit of QLACs is their exemption from Required Minimum Distributions (RMDs) until income commencement. Funds held within a QLAC are excluded from RMD calculations until payments begin or the annuitant reaches age 85. Payments from a QLAC must commence no later than the first day of the month following the annuitant’s 85th birthday. This allows for extended tax deferral on the portion of retirement savings invested in a QLAC.

Integrating QLACs into Retirement Strategy

Integrating a QLAC into a retirement strategy offers financial advantages. A primary benefit is mitigating longevity risk, providing guaranteed income that lasts throughout one’s lifespan. This creates financial security, allowing retirees to potentially spend down other assets more freely in earlier retirement.

QLACs also offer strategic tax planning opportunities, especially regarding Required Minimum Distributions. Excluding QLAC funds from RMD calculations until age 85 can reduce current taxable income from other qualified accounts. This deferral helps manage tax brackets during early retirement. A QLAC can also hedge against market volatility, as income payments are guaranteed by the insurance company.