How a QLAC Can Reduce Your Tax Bill and Guarantee Retirement Income for Life

A lesser known planning tool got a meaningful upgrade in 2023. Here is what it means for your retirement.

Most of my clients in their late 50s and early 60s have done the hard part. They have saved consistently for years. What a lot of them have not thought through yet is what happens when the IRS starts requiring them to take money out whether they need it or not.

That is what required minimum distributions are. Starting at age 73, you have to withdraw a set amount from your pretax retirement accounts every year. Those withdrawals are taxable income. Depending on how much you have saved, they can push you into a higher tax bracket, raise your Medicare premiums, and even increase how much of your Social Security benefit gets taxed.

There is a tool designed specifically for this problem. Most people have never heard of it. It is called a Qualified Longevity Annuity Contract, or QLAC. And new rules that took effect in 2023 made it more flexible than it has ever been.

What Is a QLAC?

A QLAC is a type of deferred income annuity you purchase inside a traditional IRA, 401(k), or 403(b). You put in a lump sum today, choose a future date for income to begin (anywhere from age 71 to 85), and the insurance company guarantees a monthly payment for life starting on that date.

The money moves directly from your retirement account, so there is no immediate tax event. The amount you put in is excluded from your RMD calculation until income actually begins. Under current rules you can contribute up to $210,000 per person across eligible accounts. The old rule capping contributions at 25% of your IRA balance was removed under SECURE 2.0, which made this accessible for a lot more people.

The Core Benefit: Smaller Mandatory Withdrawals

Here is a simple way to think about it. Say you have $500,000 in a traditional IRA and you put $200,000 into a QLAC with an income start date of age 82. Your RMDs from age 73 onward are now calculated on $300,000 instead of $500,000. Smaller withdrawals each year, less taxable income, and more control over how your money gets distributed in the early retirement years.

What Changed in 2023

Starting in 2023, the IRS introduced a second option for how a QLAC interacts with your annual RMD. Most people are not hearing about this yet.

The original approach is straightforward. Your QLAC premium is excluded from your RMD calculation and RMDs are simply based on what is left in your account. Clean and easy to follow.

Which option makes more sense depends on your tax picture, when your QLAC payments are scheduled to begin, and what other income sources you have. This is a decision worth working through carefully before you commit.

A Real Planning Example

Consider Marie, age 67, with $300,000 in her 401(k). She is in good health and wants guaranteed income starting around age 80 to supplement Social Security. She is not planning to live off her retirement accounts in the meantime, but she knows RMDs are coming and would rather get ahead of the tax impact now.

Is a QLAC Right for You?

This tends to work well for people who have most of their savings in pretax accounts, do not need every RMD dollar to cover monthly expenses, and want some portion of their income guaranteed no matter what markets do. If you have a pension that covers your basics, or your Social Security handles most of your regular spending, you are in a good position to think seriously about a QLAC.

One real tradeoff worth naming: QLAC funds are locked in permanently. There is no access to that money in an emergency, and the contract is irrevocable. Death benefit options exist that can pass remaining value to a beneficiary, which is worth building into the conversation before you commit. This is not a product you want to purchase without thinking through your full liquidity picture.