How Does a QLAC Defer Required Minimum Distributions (RMDs)?

The Qualified Longevity Annuity Contract (QLAC) is a specific type of longevity annuity (a.k.a. deferred income annuity) that receives unique treatment in the tax code. The QLAC was created in July 2014 when the U.S. Treasury amended the Internal Revenue Code’s required minimum distribution (RMD) rules. Prior to the amendment, the Code stipulated that IRA owners must begin withdrawing from their qualified retirement plans at age 72 (70½ prior to 2020), with minimum withdrawals calculated based on age and IRA balance. QLACs now provide a way to defer a portion of those RMDs to as late as age 85.

By transferring money (up to $145,000 allowed) out of your qualified pre-tax retirement savings plan and into a QLAC, you reduce the balance of your assets subject to the RMD calculation. The QLAC converts your savings into a pension-like stream of future guaranteed income that starts after age 72 and before age 85 and continues for life.

For example, if someone with a $580,000 IRA buys a $145,000 QLAC, his/her IRA balance subject to RMDs will decrease to $435,000. RMDs – calculated as the IRA balance / RMD distribution period – will be 25% lower, comparably reducing taxable income as well. This will continue until QLAC income starts, at which point taxable income will increase to include the QLAC paycheck.

Head to the QLAC Guide for more information and examples about RMD deferral via QLACs.