A qualified longevity annuity contract (QLAC) is a financial product designed to address increasing retirement longevity, offering a guaranteed income starting at a later age. For retirees concerned about outliving their savings, a QLAC can provide long-term security. 

In this article, you’ll learn how QLACs work, their key pros and cons, and how to know if one fits into your retirement strategy. 

What is a QLAC?

A QLAC is a fixed-rate annuity purchased from an insurance company converting tax-deferred funds from a qualified retirement account, like a 401(k) or a traditional IRA. 

QLAC annuity payments typically begin in your late 70s or early 80s. By shifting income to later in retirement, a QLAC can help protect against the risk of outliving your savings, providing a long-term financial cushion.

One of the key benefits of a QLAC is that it delays required minimum distributions (RMDs) until age 85, helping reduce your taxable income. Usually, the Internal Revenue Service (IRS) mandates that you begin taking RMDs from retirement accounts at age 73. Funds used to purchase a QLAC are excluded from that calculation, letting you defer distributions and the associated taxes. 

How does a QLAC work?

To set up a QLAC, you convert money from qualified retirement plan, such as a traditional IRA or 401(k) into the annuity  — those funds then grow at a fixed interest rate until you the annuity start date, which is the date you begin receiving monthly payments. You choose when you want your lifetime payments to start, but you must begin receiving payments by age 85. 

For example, say you’re 65 and have $500,000 in a traditional IRA. You estimate that Social Security and other investments, such as stocks and bonds, will cover your near-term expenses. To prepare for later-life income needs, you purchase a QLAC with $150,000 from your IRA. The QLAC earns a fixed 4% annual rate, and you elect to start receiving payments when you turn 80. By then, the contract’s value has grown to approximately $270,000. That sum translates to a guaranteed income stream, which could be between $1,500 and $1,800, depending on the terms of the annuity. 

QLAC rules and contribution limits

The IRS sets specific QLAC limits and rules determining how much you can invest and when you must begin receiving income. These are the most important rules to know:

• Maximum contribution: In 2025, the maximum amount you can use to fund a QLAC from your combined retirement accounts is $210,000. This cap is a per-person limit, so if you’re married, your spouse can also contribute $210,000. 
• Deferral deadline: You can only defer your payments until age 85. You must start taking distributions at that time, though you can choose to begin receiving payments earlier. 
• Qualified account types: You must fund a QLAC from tax-deferred retirement accounts, like a traditional IRA, 401(k), or 403(b). Roth IRAs and non-qualified accounts are not eligible. 
• Tax treatment: Because you fund QLACs with pre-tax income, your payments are fully taxable as ordinary income when you start receiving them. This differs from investments funded with after-tax dollars, like certain annuities, where the IRS only taxes the gains.

QLAC pros and cons

QLACs can play a valuable role in a long-term retirement plan, especially for individuals concerned with longevity risk. But like all types of annuities, QLACs aren’t right for everyone. Understanding the advantages and trade-offs is essential before committing a portion of your retirement assets. Here’s a breakdown of the main benefits and limitations. 

Pros

• Delays taxable RMDs until age 85: One of the most attractive features of a QLAC is its ability to postpone RMDs. If you want to give your assets more time to grow, this deferral can be especially useful. 
• Enables potential tax savings: By lowering the amount of money subject to RMDs in your 70s, QLAC can reduce your taxable income during those years. This may also prevent you from entering a higher tax bracket.
• Provides guaranteed lifetime income: A QLAC functions like a personal pension, delivering a reliable monthly payment for the rest of your lifetime. This provides peace of mind later in retirement, when other income streams may become less predictable. 

Cons

• Locks in funds: When you purchase a QLAC, you commit the money for a fixed period. Unlike some annuities and other retirement investments, most QLACs don’t allow early withdrawals, so you can’t access those funds in an emergency. 
• Offers no market growth: QLACs are fixed annuities. If you purchase a QLAC that pays 3.5% and interest rates improve, your interst rate  remains at 3.5%. While this provides stability, you may miss out on potential gains if markets perform well. A fixed rate also means that QLACs may be vulnerable to inflation, so the purchasing power of your payments could decline over time. 
• Limits contributions: You can only fund a QLAC from a qualified retirement account, and the contribution limit is currently $210,000 from all retirement account sources. For high net-worth individuals, this limit may be too low to make a significant impact on their overall income strategy. 

QLAC tax implications

QLACs offer a strategic way to defer income — and the taxes that come with it — until later in life. 

When you contribute to a traditional retirement account, you typically do so with pre-tax income. These contributions grow tax-deferred, helping your savings accumulate more quickly. However, once you begin drawing funds in retirement, the IRS treats the distributions as ordinary taxable income. That’s where a QLAC can help. 

By moving a portion of your retirement savings into a QLAC, you can delay paying taxes on that money until age 85. Imagine you’re 73 and have $500,000 in a traditional IRA:

• No QLAC: You must withdraw 3.77% as an RMD in your first year, adding $18,850 of taxable income to your Social Security, pension, and any other income you receive.
• $150,000 in a QLAC: Only the remaining $350,000 in the IRA is subject to RMD calculations. Your first-year RMD would be $13,195, reducing your taxable income by $5,655.

This deferred income can result in significant tax savings over time.

Build long-term financial security with Gainbridge

At Gainbridge, we believe planning for retirement should be simple and stress-free. We have a range of annuity options designed to support your long-term investment strategy, with no hidden fees. SteadyPace™ gives you a guaranteed path to future income. If you're exploring income options for your retirement, contact Gainbridge today. 

‍

This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as individualized investment, legal, or tax advice. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.

Guarantees are subject to the financial strength and claims paying ability of the issuing insurance company. Annuities are issued by Gainbridge Life Insurance Company, located in Zionsville, Indiana. Annuities are long-term investment vehicles and contain terms for keeping them in force. You should carefully review the contract terms prior to contributing to an annuity.