How Does a QLAC Work: Payouts, RMD Exclusion, and Taxes

A qualified longevity annuity contract, or QLAC, works like this: you move pre-tax money from a retirement account into a deferred income annuity issued by an insurance company, pick a future date for income to begin, and in return get a guaranteed monthly check for life starting on that date. The premium you commit is excluded from your required minimum distribution calculations until payments begin, and the lifetime purchase limit for 2026 is $210,000 across all your qualified accounts.¹ Payments must start no later than the first day of the month after you turn 85.²

The RMD Exclusion, Which Is the Point

Once you turn 73, the IRS requires you to start withdrawing from traditional retirement accounts each year, and every dollar you pull out is taxed as ordinary income. Your annual RMD is calculated on the balance of those accounts. A QLAC removes its premium from that balance and keeps it out until annuity payments begin.²

The math is direct. If you’re 73 with $800,000 in a traditional IRA and you put $200,000 into a QLAC, your RMD is calculated on the remaining $600,000. Lower forced withdrawals mean lower taxable income each year of the deferral period, in exchange for giving up access to that $200,000 until the income start date arrives.

Which Accounts You Can Use

You can fund a QLAC with money from a traditional IRA, SEP IRA, SIMPLE IRA, traditional 401(k), 403(b), or governmental 457(b).² Roth IRAs and inherited IRAs are not eligible. Roths already have no lifetime RMDs, so there’s nothing to exclude. Inherited IRAs operate under separate distribution rules that don’t accommodate the structure.

The $210,000 lifetime cap for 2026 aggregates across every qualified account you own.¹ If you put $150,000 from an IRA into a QLAC, you can add at most $60,000 more from any other eligible account. Section 202 of the SECURE Act 2.0 raised the base cap to $200,000 and eliminated the earlier rule that also limited purchases to 25 percent of the account balance. The IRS adjusts the dollar limit for inflation in $10,000 increments.

If a premium payment pushes you past the cap, the contract loses QLAC status on that date and its full value gets added back into your RMD base.² The excess can be returned to the non-QLAC portion of the account by the end of the calendar year following the year you overpaid; done in time, the IRS treats it as if the excess never happened. Excess IRA contributions otherwise carry a 6 percent excise tax for each year they remain uncorrected.³

When Payments Start and How They’re Structured

You pick the income start date when you buy the contract. Federal regulations set the outer boundary: income must start no later than the first day of the month after you turn 85.² You can choose an earlier date, and some contracts let you accelerate the start date after purchase. The insurer must report on Form 1098-Q whether acceleration is available for your specific contract.⁴

The longer you defer, the higher your monthly payments. The insurer has more time to invest the premium and a shorter expected payout period. Once payments begin, the amount is fixed for the life of the contract.

At the time of purchase, you pick how the income is structured:

Single life pays for your lifetime only and produces the highest monthly amount, because the insurer’s obligation ends when you die.
Joint and survivor pays for the longer of your life or your spouse’s life. Monthly payments are lower. The surviving spouse’s check may match the original amount or drop to a set percentage, depending on the contract.

An optional cost-of-living adjustment rider will step your payments up by a fixed percentage each year after income begins, but adding it reduces your starting payment, sometimes substantially. Without it, you’re fixing today’s dollars against however many years of inflation separate purchase from payout.

How the Payments Are Taxed

Because a QLAC is funded with pre-tax retirement money, every dollar you receive in annuity payments is taxed as ordinary income in the year you receive it. There’s no partial exclusion and no capital gains treatment. Payments show up on your tax return the same way any traditional IRA or 401(k) distribution would, at your marginal rate.

Plan around the stacking effect. If a QLAC starts paying $30,000 a year at 85, that income sits on top of Social Security, any pension, and any distributions from other retirement accounts. Depending on your total income, it can push you into a higher bracket or increase the share of Social Security benefits subject to tax. The deferral period postpones the tax; it doesn’t erase it.

What Happens If You Die

Most QLACs offer an optional return-of-premium feature. If you die before payments begin, your beneficiaries receive the full premium you paid. If you die after payments have started, they receive the difference between your total premium and the payments you already collected.⁴ Once cumulative payouts equal the premium, the death benefit is exhausted.

Adding this feature reduces your monthly payments because the insurer takes on the added obligation. Some contracts pay it as a lump sum; others in installments. Any return-of-premium payment must be made by the end of the calendar year following the year you die.⁴ If your death occurs after your required beginning date for RMDs, the return-of-premium payment is treated as an RMD for the year it’s paid and cannot be rolled over.

Without the return-of-premium feature, the insurer keeps whatever’s left if you die early. That’s the underlying bet of a pure life annuity: longevity risk is pooled, and those who live longest benefit from the premiums of those who don’t.

The Trade-Offs

The biggest one is irrevocability. Once the insurer accepts your premium, you cannot withdraw the money, borrow against it, or surrender the contract for cash. There is no cash surrender value; the concept doesn’t apply. If a medical emergency or a change in plans hits three years later, that money isn’t available. Only commit funds you’re genuinely sure you won’t need before the income start date.

Inflation is the second issue. Payments are locked in at purchase. Buy at 65 with income starting at 85, and you’re fixing today’s dollars against 20 years of price changes. The COLA rider addresses this but costs you starting income.

Third is insurer credit risk. Annuities are not backed by the FDIC. If the insurer fails, state guaranty associations provide a safety net, but coverage has limits. Most states protect up to $250,000 in present value of annuity benefits per insurer, with an overall cap of $300,000 across all policies with the same insolvent carrier. Buying from highly rated carriers is the first line of defense, and if you’re committing anything close to the $210,000 cap to a single contract, checking financial strength ratings from AM Best or a similar agency is basic due diligence.

How You Actually Buy One

Not every carrier offers QLACs, and the ones that do vary in minimum purchase amounts, available riders, and payout rates. Minimums at major carriers start around $10,000. Get quotes from two or three carriers with strong financial strength ratings; commissions are built into the product price, so the quote already reflects those costs, and rates differ enough between carriers that shopping can mean thousands of dollars in additional annual income from the same premium.

Before applying, have the funding account’s number and custodian name, your date of birth and Social Security number, and full identifying details for each beneficiary. Beneficiary information is essential if you elect return-of-premium, because the insurer can’t structure the death benefit without it. Married participants in employer plans like 401(k)s should expect a spousal consent requirement when directing plan assets into an annuity that isn’t a joint-and-survivor form.

The purchase itself is funded through a direct transfer from your existing retirement account to the insurance company. The insurer requests the transfer, your custodian liquidates what’s needed and wires the premium directly.⁵ Because the money moves custodian to custodian, you never touch it and no taxable distribution occurs.

Once the premium is received, you’ll get a formal contract with your income start date, payment amount, and beneficiary elections. Check the premium, the deferral period, the return-of-premium election, and the beneficiary designations. Most states require a free-look period of at least 10 days during which you can cancel for a full refund. That window is your last chance before the contract becomes irrevocable.

The 1098-Q You’ll Receive Each Year

Every year from purchase until you turn 85 or die, the insurance company files Form 1098-Q with the IRS and sends you a copy. It reports the cumulative premiums paid, the fair market value of the contract, the scheduled income start date, and the projected annuity payment.⁴ You don’t file anything with it at tax time; keep it in your records. Its role is to confirm to the IRS that the contract still qualifies as a QLAC, which is what keeps the premium excluded from your RMD base. If the premium total or start date on the form looks wrong, contact the insurer right away, because an inaccuracy can raise questions about the contract’s compliance.

1
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted
2
eCFR. 26 CFR 1.401(a)(9)-6
3
Office of the Law Revision Counsel. 26 U.S. Code 4973
4
Internal Revenue Service. Instructions for Form 1098-Q
5
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions