Many retirees today have a large portion of their savings in IRAsor 401(k) accounts. While these accounts grow tax-deferred, the IRS eventually requires you to start taking money out through Required Minimum Distributions (RMDs).
For some retirees, those RMDs can create a tax problem. The withdrawals may increase taxable income, potentially affecting Medicare premiums, Social Security taxation, or overall tax liability.
In this Cardinal Advisors lesson, we explain a strategy that can sometimes help reduce this pressure while creating income later in retirement: the QLAC, or Qualified Longevity Annuity Contract.
What Is a QLAC?
A QLAC (Qualified Longevity Annuity Contract) is a special type of annuity purchased inside an IRA or retirement plan.
The main purpose of a QLAC is to delay income until later in life, while also removing that portion of the IRA from the RMD calculation.
Instead of being required to withdraw that money when RMDs begin, you can set it aside to create guaranteed income later in retirement.
The IRS created this option specifically to help retirees manage longevity risk—the possibility of living longer than expected and needing income well into their 80s and 90s.
The RMD Benefit
One of the main reasons people consider a QLAC is that it can reduce the amount of IRA money subject to RMDs.
Under current rules, up to $210,000 (2026 limit) of IRA money can be placed into a QLAC.
That amount is excluded from the RMD calculation, which means:
- Your required withdrawals may be smaller
- Your taxable income may be lower
- You may have more flexibility in retirement tax planning
This can be particularly helpful for retirees who do not need their RMD income yet but are required to take it anyway.
When Does the Income Start?
Unlike many annuities that begin paying income immediately, a QLAC is designed to start income later in life.
Income can begin at any time you choose, but no later than age 85.
Some retirees choose to start income at:
- Age 80
- Age 82
- Age 85
The longer you delay the income start date, the larger the monthly payment will typically be.
Example of a QLAC Strategy
In the example we discussed in the video:
- A 62-year-old husband purchases a QLAC using $210,000 from his IRA
- His 59-year-old wife is included as a joint beneficiary
- Income is scheduled to start at age 80
In this scenario, the QLAC would generate roughly:
About $4,000 per month
(or approximately $48,000 per year)
That income continues for as long as either spouse is alive.
If the couple lives a long time, the total payout from the contract could exceed $1 million.
Who Might Benefit from a QLAC?
A QLAC is not something most people call us asking for specifically. Instead, it is typically used as one piece of a larger retirement plan.
It may be worth considering for people who:
- Have large IRA balances
- Are concerned about future RMD taxes
- Do not currently need their RMD income
- Want guaranteed income later in life
- Are worried about outliving their money
For the right person, a QLAC can function like a “back-end pension” that begins paying later in retirement.
Important Things to Consider
While a QLAC can be helpful, there are also important downsides to understand.
The Money Is Illiquid
Once the money goes into a QLAC, it cannot be accessed or reversed. This means the funds should only come from money you are confident you will not need earlier.
Returns Are Conservative
Because the insurance company must guarantee lifetime income, the underlying interest assumptions are typically very conservative compared to market investments.
It Should Be Part of a Larger Plan
At Cardinal Advisors, we rarely recommend a QLAC by itself.
Instead, it may be used alongside strategies involving:
- Social Security planning
- Investment management
- Long-term care planning
- Estate planning
- Tax planning strategies
The Bottom Line
A QLAC can be a useful planning tool for the right retiree.
It can help:
Reduce future RMD pressure
Provide guaranteed income later in life
Protect against longevity risk
Provide peace of mind in advanced age
However, it works best when used as part of a comprehensive retirement plan that considers taxes, income needs, and long-term financial goals.
If you want to see whether a QLAC might make sense in your situation, the first step is to look at your overall retirement plan and income strategy.
