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

Published January 10, 2019
By transferring money out of your Traditional IRA and into a QLAC, you reduce the Traditional IRA balance subject to RMDs, deferring them until the QLAC income starts.

The Qualified Longevity Annuity Contract (QLAC) is a specific type of 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 70½, 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 $130,000 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 between ages 70½ and 85 and continues for life.

For example, if someone with a $520,000 IRA buys a $130,000 QLAC, his/her IRA balance subject to RMDs will decrease to $390,000. 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.

Lauren Minches

Lauren Minches

Financial Planning Professional

Lauren is an actuary by training with expertise in retirement, finance, and risk. She writes about annuities to make them easier to understand and evaluate. Her goal is to help people create retirements with more time for living and less time thinking about money.