Qualified longevity annuity contract

What Is a Qualified Longevity Annuity Contract?

A qualified longevity annuity contract (QLAC) is a specialized type of deferred annuity that individuals can purchase with funds from their qualified retirement accounts, such as an individual retirement account (IRA) or 401(k) plan. This financial instrument is designed primarily to address longevity risk, which is the possibility of outliving one's retirement savings. Unlike other annuities that might begin payments shortly after purchase, a QLAC defers the start of its guaranteed income stream until a much later age, typically 80 or 85, providing financial security in advanced retirement years. The value of the QLAC is excluded from the account balance used to determine required minimum distribution (RMD) rules, which are typically mandated to begin at age 73 for most retirement accounts. This exclusion allows the remaining assets in a retiree's other accounts to grow longer on a tax-deferred basis.

History and Origin

The concept of a qualified longevity annuity contract emerged from discussions about ensuring adequate income for a growing population of retirees who are living longer. Prior to 2014, individuals faced an obstacle in using their tax-deferred retirement savings for very long-term deferred annuities: existing RMD rules required distributions to begin by a certain age, often earlier than when a longevity annuity's payments would typically commence. This meant that the full value of a deferred annuity held within a qualified account would still be subject to RMD calculations, potentially forcing premature taxable withdrawals.

To address this, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued final regulations on July 2, 2014, establishing the rules for QLACs. These regulations provided a crucial exception to the RMD rules, allowing a portion of a retirement account to be invested in a QLAC without being subject to RMDs until the annuity payments actually begin, no later than age 85.¹⁷ This legislative change aimed to encourage individuals to secure guaranteed income for their later years, acknowledging the decline of traditional defined contribution plan pensions and increased individual responsibility for retirement planning. The market for QLACs began to develop following this ruling.¹⁶ Further legislative changes, such as the SECURE 2.0 Act of 2022, have since adjusted the maximum permissible investment limits for QLACs.

Key Takeaways

• A QLAC is a specialized deferred annuity purchased with qualified retirement funds that provides a guaranteed income stream starting at a very late age, typically 80 or 85.
• The primary benefit of a QLAC is that the amount invested is excluded from RMD calculations until payments begin, allowing other retirement savings to continue growing tax-deferred.
• QLACs are designed to protect against longevity risk, ensuring income continues for as long as the annuitant lives.
• There are limits on how much can be invested in a QLAC, and payments must commence by age 85 at the latest.
• QLACs are generally inflexible, offering no cash surrender value or early withdrawals.

Interpreting the Qualified Longevity Annuity Contract

Interpreting a qualified longevity annuity contract involves understanding its role within an overall retirement strategy. A QLAC is not designed for short-term liquidity or significant capital growth; rather, it serves as a form of longevity insurance. Its value is derived from the guaranteed, predictable income it will provide in very late retirement, when other assets may be depleted.

The decision to purchase a QLAC should be viewed in the context of one's anticipated lifespan, other sources of retirement income like Social Security, and personal risk tolerance. For those particularly concerned about outliving their savings, a QLAC provides a contractual guarantee of income for life, irrespective of market fluctuations. The exclusion from RMD calculations means that investing in a QLAC can potentially lower an individual's taxable income during their earlier retirement years, as a portion of their retirement funds are effectively "sheltered" from these mandatory withdrawals until a later date.¹⁵

Hypothetical Example

Consider Sarah, a 65-year-old retiree with a substantial balance in her traditional IRA. She is concerned about maintaining her lifestyle if she lives well into her 90s, beyond the typical span covered by her current savings and Social Security. She decides to use a portion of her IRA to purchase a QLAC.

Sarah invests $100,000 into a QLAC, with payments scheduled to begin when she turns 85. From the time of purchase until she reaches 85, this $100,000 (and any growth on it) is removed from the balance used to calculate her annual RMDs from her remaining IRA. This means her RMDs in her early 70s are based on a smaller account balance, potentially reducing her taxable income during those years.

When Sarah turns 85, her QLAC begins paying her a guaranteed monthly sum for the remainder of her life. Even if her other retirement funds have been significantly drawn down, or if the market experiences a downturn, she will continue to receive this predetermined income, providing a financial safety net against extreme longevity. If the QLAC includes a return of premium death benefit, and Sarah passes away before receiving total payments equal to her $100,000 premium, her designated beneficiary would receive the difference.

Practical Applications

QLACs find practical application primarily in advanced retirement planning for individuals seeking to hedge against the financial risks of an extended lifespan. They are particularly useful for those with significant tax-deferred retirement savings who wish to:

• Reduce early RMDs and Taxable Income: By purchasing a QLAC, funds are removed from the RMD calculation base, potentially lowering an individual's taxable income during their early retirement years (typically from age 73 until QLAC payments begin).¹⁴ This can be beneficial for tax management strategies.
• Ensure Guaranteed Lifetime Income: A QLAC provides a predictable, guaranteed income stream that cannot be outlived, offering peace of mind and financial security in very late life, when other assets may be depleted. This helps manage the uncertainty of future expenses and longevity.
• Diversify Retirement Income Sources: For many retirees, a QLAC adds another layer of security to their retirement income portfolio, complementing Social Security and other investment accounts. It acts as a dedicated source of income for extreme old age.
• Simplify Late-Life Finances: Once the payments begin, a QLAC offers a simple, hands-off income solution, reducing the need for active investment management in very advanced years.

The U.S. Department of Labor has highlighted QLACs as a potential way to secure income for older ages, particularly in an environment where traditional defined benefit pensions are less common.¹³

Limitations and Criticisms

While a qualified longevity annuity contract offers distinct advantages, it also comes with notable limitations and criticisms that potential purchasers should consider:

• Illiquidity: Once funds are allocated to a QLAC, they are generally locked in until the annuity payments begin. QLACs typically have no cash surrender value and do not allow for early withdrawals or loans against the contract.¹² This lack of access can be a significant drawback if unexpected financial needs arise before the income stream commences.
• Inflation Risk: Many QLACs provide fixed payments that do not adjust for inflation. Over a long deferral period (e.g., from age 65 to 85), the purchasing power of the future guaranteed income can erode significantly, meaning the fixed payment may buy less in real terms years down the line. Some QLACs may offer an inflation adjustment feature, but this often comes at the cost of lower initial payouts.¹¹
• Mortality Risk (Dying Early): A primary criticism is the risk of dying before or shortly after the annuity payments begin. If the annuitant passes away before receiving payments equal to their premium, and the contract does not include a "return of premium" death benefit (or if that benefit has been fully paid out), the remaining principal is forfeited to the insurance company. While a return of premium feature can mitigate this, it typically results in lower periodic payouts.¹⁰
• Limited Growth Potential: A QLAC is a type of fixed annuity, meaning its growth potential is limited. The funds invested are not exposed to market upside, unlike investments in equities or mutual funds. For individuals seeking higher potential returns, dedicating a portion of their assets to a QLAC might be seen as a missed opportunity for growth.⁹
• Cap on Contributions: There are limits on the amount that can be invested in a QLAC. As of 2025, individuals can allocate up to $210,000 from their qualified retirement accounts to a QLAC, a limit that is subject to inflation adjustments.⁸ This cap means QLACs may only cover a portion of an individual's late-life expenses.

Despite these limitations, for some individuals, the guaranteed income and RMD deferral benefits of a QLAC can outweigh the drawbacks, especially as a component of a well-diversified retirement planning strategy.⁷

Qualified Longevity Annuity Contract vs. Deferred Annuity

While a qualified longevity annuity contract (QLAC) is a specific type of deferred annuity, there are key distinctions that set it apart. A deferred annuity is a broad category of annuity contract where payments are delayed until a future date, often chosen by the policyholder. This delay allows the accumulated premium to grow on a tax-deferred basis.

The crucial difference lies in the tax treatment related to RMDs. Before the introduction of QLACs, if a standard deferred annuity was held within a qualified retirement account, its value would generally be included in the calculation of the owner's RMDs, meaning withdrawals would be mandated by age 73 (or prior RMD ages), regardless of the annuity's payment start date.

A QLAC, however, is a deferred annuity that adheres to specific IRS regulations, primarily allowing the amount invested in it to be excluded from RMD calculations until payments begin, which must be no later than age 85. This unique tax benefit is what defines a QLAC and distinguishes it from a regular deferred annuity used within a qualified plan that does not meet these specific IRS criteria. All QLACs are deferred annuities, but not all deferred annuities qualify as QLACs.⁶

FAQs

What is the maximum amount I can put into a QLAC?

As of 2025, you can generally allocate up to $210,000 of your qualified retirement funds into a qualified longevity annuity contract over your lifetime. This amount is subject to periodic inflation adjustments.⁵

When do payments from a QLAC begin?

You choose when payments begin, but they must start no later than the first day of the month following your 85th birthday. You can elect an earlier start date if you wish.⁴

Can I withdraw money early from a QLAC?

Generally, no. A qualified longevity annuity contract is designed to be highly illiquid. Once purchased, the funds are locked in until the designated income start date, and there is typically no cash surrender value or option for early withdrawals.³

What happens if I die before receiving all my money back from a QLAC?

Many QLACs offer a "return of premium" death benefit. If you die before receiving total payments equal to the premium paid, your designated beneficiary would receive the difference. However, including this feature often results in lower monthly payments during your lifetime.²

Do QLACs protect against inflation?

Not automatically. Most basic qualified longevity annuity contracts provide fixed payments that do not adjust for inflation. Some insurers offer an inflation adjustment rider, but this typically reduces the initial payout amount. It is important to consider the long-term impact of inflation on the purchasing power of your future income stream.¹