9.3 Qualified Longevity Annuity Contracts (QLACs)

Qualified Longevity Annuity Contracts (QLACs)

Core Principle: Qualified Longevity Annuity Contracts (QLACs) resolve a historic statutory conflict between tax policy and retirement income security. QLACs let retirement savers carve out up to $210,000 (the 2026 limit) from qualified retirement accounts and exclude those dollars from Required Minimum Distribution (RMD) calculations until income starts, as late as age 85. That makes them a bridge between tax deferral and late-life longevity protection.

Statutory Framework & Legislative History

Prior to 2014, purchasing a Deferred Income Annuity (DIA) inside a tax-deferred retirement account was practically impossible due to the Required Minimum Distribution (RMD) rules of IRC §401(a)(9). RMD rules require account owners to begin withdrawing a statutory percentage of their pre-tax retirement balances each year starting at their Required Beginning Date. Because traditional DIAs are illiquid contracts with no cash surrender value, calculating and satisfying RMDs from an illiquid asset created insurmountable administrative barriers.

To address this dilemma, the U.S. Department of the Treasury issued final regulations in July 2014 (TD 9673, codified under Treas. Reg. §1.401(a)(9)-6 and IRC §401(a)(9)(I)), officially creating the Qualified Longevity Annuity Contract (QLAC).

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Eligible Accounts & The Core RMD Exclusion

A QLAC can be purchased within or rolled over from:

• Traditional IRAs
• SEP IRAs (subject to ongoing contribution rules)
• SIMPLE IRAs
• Qualified Defined Contribution Plans (IRC §401(k) and §401(a))
• IRC §403(b) Tax-Sheltered Annuities
• Eligible Governmental IRC §457(b) Plans

[!IMPORTANT] Roth IRAs are statutorily ineligible to hold QLACs. Because Roth IRAs are exempt from RMDs during the original account owner's lifetime under IRC §408A(c)(5), the primary statutory incentive of a QLAC—RMD relief—is completely irrelevant. A retiree wishing to purchase longevity insurance with Roth funds can simply purchase a commercial non-qualified DIA.

The RMD Exclusion Mechanism

The central tax advantage of a QLAC is codified in Treas. Reg. §1.401(a)(9)-6, Q&A-17: The dollar value of a QLAC is entirely excluded from the December 31 qualified account balance used to calculate the participant's annual RMD.

For example, if an IRA owner holds $1,000,000 on December 31 and allocates $200,000 to a QLAC, the RMD calculation for the subsequent year is calculated solely against the remaining $800,000 liquid balance. This reduces taxable RMD income throughout the deferral period, shielding the client from unwanted income acceleration between statutory RMD age and age 85.

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Statutory Purchase Limits: The SECURE 2.0 Overhaul

The passage of the SECURE 2.0 Act of 2022 (Section 202) dramatically overhauled and simplified the statutory purchase rules for QLACs, effective for contracts purchased on or after December 29, 2022:

1. Repeal of the 25% Account Balance Limitation

• Prior Law: Under the 2014 regulations, an individual could allocate no more than the lesser of 25% of their aggregate qualified account balances or a fixed dollar cap. This 25% limit created immense compliance complexity; market downturns occurring after purchase could cause accidental over-allocations, subjecting taxpayers to excess accumulation penalties.
• SECURE 2.0 Change: Congress completely abolished the 25% account limit. An individual with a $250,000 Traditional IRA can now allocate up to the full statutory dollar limit without violating IRS rules.

2. Expansion of the Statutory Dollar Cap

• Prior Law: The dollar limit started at $125,000 under the 2014 regulations and had been adjusted to $145,000 by 2022.
• SECURE 2.0 Change: SECURE 2.0 raised the cap to $200,000, indexed for inflation in $10,000 steps. The limit is $210,000 for 2025 and 2026 (IRS Notice 2025-67).
• Cumulative Per-Person Cap: The dollar limit applies per individual across all of that person's IRAs and plans combined. An individual cannot get around it by buying the maximum in an IRA and again in a 401(k). Each spouse, however, has a separate limit for their own accounts.

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Maximum Commencement Age & Timing Rules

Treasury Regulations establish strict parameters regarding when QLAC payments must begin:

• Maximum Commencement Date: Annuity payments must commence no later than the first day of the month following the annuitant's attainment of age 85.
• Early Commencement Flexibility: The contract owner may elect to begin payments prior to age 85 (e.g., at age 75, 78, or 80). If payments begin early, the monthly payout is actuarially recalculated downward based on the earlier start date.
• No Deferral Past 85: A contract whose payments could start later than the first day of the month after the annuitant turns 85 does not meet the QLAC requirements. It would not be a QLAC, so its value would count in the account balance used to calculate RMDs. Simply buying such a contract does not by itself trigger a taxable distribution.

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Permitted vs. Prohibited Contract Features

To qualify for statutory RMD exemption, a QLAC must adhere to rigorous structural boundaries:

Permitted Features

• Single Life Annuity: Guaranteed for the lifetime of the participant.
• Joint and Survivor Annuity: Payments continue over the joint lives of the participant and a designated beneficiary (spousal or non-spousal).
• Return of Premium (ROP) Death Benefit: The contract may provide that if the annuitant dies before cumulative payments equal the purchase premium, the difference is refunded to the beneficiary as a cash refund or installment refund. This can apply both before and after income commencement.
• Cost-of-Living Adjustments (COLAs): Fixed percentage annual increases (e.g., 2% or 3%) are permitted.

Strictly Prohibited Features

• Variable Annuity Subaccounts: QLACs cannot be variable contracts; investments cannot be tied to equity markets.
• Equity-Indexed / Fixed-Indexed Crediting: Indexed crediting options are prohibited under the core regulations.
• Period-Certain Contracts without Life Contingency: A contract that pays strictly for 10 or 20 years without a lifetime guarantee is disallowed.
• Commutation or Cash Surrender Values: The owner cannot have access to cash surrender values, policy loans, or lump-sum commutation rights once the contract is issued. It must remain an illiquid life-contingent income instrument.

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Comparison: Traditional IRA vs. Standard DIA vs. QLAC

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Surviving Spouse Protections & Beneficiary Rules

Treasury Regulations provide robust protections for surviving spouses under a QLAC:

• Spousal Joint & Survivor Options: A participant can name their spouse as a joint annuitant with up to a 100% survivor continuation. The spousal survivor benefit is not reduced regardless of age disparity.
• Non-Spousal Beneficiaries: If a non-spouse beneficiary is designated on a joint life QLAC, Treas. Reg. §1.401(a)(9)-6 mandates actuarial percentage reductions based on the age gap between the participant and beneficiary to ensure the contract does not become a vehicle for excessive intergenerational tax deferral.
• Pre-Commencement Death: If the participant dies before income commences at age 85, a contract containing a Return of Premium feature must refund the unrecovered premium to the designated beneficiary by the end of the calendar year following the year of death, or continue as a life annuity to a surviving spouse.

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Strategic Integration: Hedging the "Late-Life Horizon"

In comprehensive retirement income decumulation, the QLAC serves three distinct strategic functions:

1. Tax Drag Reduction: By stripping $200,000 from the RMD base between age 73 and age 85, the retiree dampens unwanted ordinary income spikes. This lowers provisional income (reducing the taxability of Social Security benefits under IRC §86) and helps avert high Medicare Part B and Part D IRMAA surcharges.
2. Unlocking Early Retirement Spending: Many retirees under-spend during their active "go-go" retirement years (ages 65–75) out of dread that they will exhaust their savings if they survive into their 90s. Carving out a QLAC that guarantees substantial monthly income starting at age 85 allows the retiree to spend their remaining liquid portfolio more aggressively between ages 65 and 85, knowing their late-life baseline is permanently insured.
3. Cognitive Decline Insurance: Self-managing an investment portfolio becomes increasingly hazardous past age 80 due to cognitive decline and vulnerability to elder financial abuse. A QLAC provides institutionalized, automated, un-alterable cash flow directly to the retiree's checking account.

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Advisor-Client Case Scenario: The SECURE 2.0 QLAC Allocation

Robert (age 72) is a widower with $800,000 in a Traditional IRA. He has substantial non-retirement income from an executive pension ($60,000/year) and Social Security ($42,000/year), which fully covers his daily living expenses. Robert's primary concerns are:

• He faces mandatory RMDs starting at age 73 that will push him into higher federal tax brackets and trigger steep Medicare IRMAA surcharges.
• Both of his parents lived past age 95, creating significant long-term care and extreme longevity anxiety.

Implementation Plan

In early 2026, Robert's advisor implements a $200,000 QLAC inside his Traditional IRA, within the $210,000 limit. Income begins at 85 and includes a cash refund death benefit.

Results & Analysis

1. Immediate RMD Relief: On December 31, Robert's IRA balance of $800,000 is reduced by the $200,000 QLAC. His initial RMD at age 73 is calculated against $600,000 rather than $800,000.
   • Standard Uniform Lifetime Table factor at age 73: 26.5
   • Without QLAC: $800,000 ÷ 26.5 = $30,189 RMD
   • With QLAC: $600,000 ÷ 26.5 = $22,642 RMD
   • Annual Taxable Income Reduction: $7,547 in Year 1 alone.
2. Twelve Years of Compounded Tax Shelter: Between ages 73 and 85, Robert shields hundreds of thousands of cumulative dollars from RMD calculations, maintaining lower tax brackets and avoiding higher IRMAA tiers.
3. Late-Life Income Certainty: At age 85, the QLAC activates, generating a guaranteed lifetime income of approximately $4,200 per month ($50,400 per year). If Robert dies prior to age 85, his daughter receives the full $200,000 cash refund.

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Practical Calculation: Quantifying 12-Year RMD Reductions

Assuming a constant 5% gross portfolio growth rate on Robert's remaining liquid IRA assets ($600,000) vs. the original $800,000 account:

• Taking the RMDs for ages 73 through 84 (12 distributions) from an $800,000 account without the QLAC totals approximately $466,000.
• Taking the same RMDs from the $600,000 liquid balance after the QLAC purchase totals approximately $350,000.
• Cumulative RMD reduction: about $117,000 of required taxable income is deferred during Robert's 70s and early 80s.
• At a 24% marginal rate, that defers roughly $28,000 of federal tax. The QLAC's own payments, starting at 85, will be fully taxable when received, so this is deferral plus longevity insurance, not tax elimination.

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Exam Tip

RICP test questions on QLACs focus intensely on the post-SECURE 2.0 statutory rules:

• The purchase limit is $200,000 indexed for inflation ($210,000 in 2026). The old 25% of account balance cap was repealed by SECURE 2.0.
• The latest allowable commencement age is the first day of the month following attainment of age 85.
• Roth IRAs cannot hold QLACs because Roth IRAs have no pre-death RMDs.
• QLACs MUST be fixed annuities; variable or indexed subaccount crediting is strictly prohibited under Treasury Regulations.