What Is a Qualified Longevity Annuity Contract (QLAC)?

A Qualified Longevity Annuity Contract (QLAC) is a specialized type of deferred income annuity designed to provide a guaranteed income stream later in life. Its primary purpose is to help mitigate the risk of outliving one’s financial resources during extended retirement years.

Understanding Qualified Longevity Annuity Contracts

A QLAC is a specific type of deferred income annuity purchased from an insurance company using funds from a qualified retirement plan, such as a 401(k), 403(b), or an Individual Retirement Account (IRA). The contract involves paying a premium upfront, either as a lump sum or a series of payments, in exchange for guaranteed income payments that are deferred until a much later, predetermined age. Typically, these payments are set to begin when the annuitant reaches an age like 80 or 85.

For an annuity to qualify as a QLAC under Internal Revenue Service (IRS) regulations, it must meet several specific requirements. One key rule, updated by the SECURE 2.0 Act, specifies a maximum amount that can be allocated to a QLAC. For 2025, this limit is $210,000 per person across all retirement accounts, a lifetime aggregate limit that is adjusted annually for inflation.

Another IRS requirement dictates that income payments from a QLAC must commence no later than the first day of the month following the annuitant’s 85th birthday. A QLAC cannot have a cash surrender value, and it generally cannot be commuted or converted back into a lump sum.

The contract must explicitly state its intention to be a QLAC when issued. While QLACs primarily focus on providing income, they are permitted to include limited death benefit options, such as a return of premium feature, which ensures beneficiaries receive at least the amount paid in premiums if the annuitant dies before receiving equivalent payments. These specific rules allow the portion of retirement savings invested in a QLAC to receive favorable tax treatment, particularly concerning required minimum distributions, until income payments begin.

How QLACs Address Retirement Income Needs

QLACs play a strategic role in retirement planning by directly addressing longevity risk. By providing a guaranteed income stream that starts later in life, typically at an advanced age such as 85, a QLAC helps ensure individuals have a dependable financial foundation. This predictable income offers financial security, complementing other retirement income sources like Social Security or pensions.

A significant benefit of QLACs lies in their interaction with Required Minimum Distributions (RMDs). Funds allocated to a QLAC are excluded from the calculation of an individual’s RMDs from their qualified retirement accounts until the QLAC’s income payments commence. This exclusion allows individuals to defer taxes on the portion of their retirement savings invested in a QLAC, potentially reducing their taxable income in the earlier years of retirement when RMDs from other accounts might otherwise increase their tax liability.

This deferral of RMDs on the QLAC portion can be particularly advantageous for those who do not immediately need all their retirement savings in their early retirement years. It provides flexibility in tax planning, allowing other retirement assets to potentially grow for a longer period without being subject to immediate distribution requirements. The guaranteed nature of QLAC payments also protects the allocated funds from market volatility, offering a stable component within a diversified retirement portfolio.

The ability to defer income and reduce current RMDs helps manage overall tax obligations, potentially keeping individuals in a lower tax bracket during the initial stages of retirement. This strategic tax deferral, combined with the guaranteed lifetime income feature, makes QLACs a valuable tool for individuals.

Important Features of QLACs

Once a QLAC is purchased, the contract is irrevocable, meaning the funds committed to it cannot be surrendered for a lump sum or withdrawn before the agreed-upon payment start date. The money allocated to a QLAC becomes illiquid, and access to these funds is restricted until the annuity payments begin. Consequently, individuals should ensure that they have sufficient liquid assets to cover their needs before their QLAC income commences.

Many QLACs offer the option of an inflation protection rider, also known as a cost-of-living adjustment (COLA). This feature allows the annuity payments to increase annually by a specified percentage, such as 1% to 3%, helping to maintain the purchasing power of the income stream over time against rising costs. However, selecting an inflation rider typically results in lower initial income payments compared to a contract without this feature.

While QLACs are primarily designed for income provision, they do permit certain limited death benefit options. The most common is a “return of premium” feature, which ensures that if the annuitant dies before receiving total payments equal to the premium paid, the difference is paid to a designated beneficiary. This option may reduce the amount of the lifetime income payments.

QLACs can also be structured to provide income for more than one person through a joint life option. A spousal continuation feature allows payments to continue to a surviving spouse after the primary annuitant’s death, ensuring financial support for both individuals throughout their lives.