What Is a QLAC? A Plain-Language Guide for New Jersey Retirees
What a QLAC is
A Qualified Longevity Annuity Contract (QLAC) is a specific type of deferred income annuity that can be purchased inside a traditional IRA or 401(k). It is designed to solve a specific problem: the risk of outliving your retirement assets in very late life.
Here is how it works:
- You use a portion of your IRA or 401(k) balance to purchase the QLAC, typically between ages 60 and 75
- Income payments begin at a future date you select — as late as age 85
- The premium used to purchase the QLAC is excluded from your RMD calculation until payments begin
- Once payments begin, they continue for the rest of your life (or a fixed period, depending on the contract)
The IRS sets the contribution limit for QLACs. Under SECURE 2.0, the limit was raised to $200,000 — up from $145,000 — making it a more meaningful planning tool for larger IRAs.
The two problems QLACs solve
QLACs address two distinct planning challenges:
Problem 1 — Longevity risk: Most retirement income projections use life expectancy as a planning horizon. But life expectancy is an average — which means roughly half of retirees will live longer than the model assumes. A QLAC provides guaranteed income beginning at an advanced age (say, 80 or 85), functioning as insurance against the scenario where you outlive your other assets.
Problem 2 — RMD management: The premium used to purchase a QLAC is excluded from the IRA balance that drives RMD calculations until payments begin. For a retiree with a $1.5 million IRA who purchases a $200,000 QLAC, the RMD calculation runs on $1.3 million rather than $1.5 million from age 73 through the QLAC start date. This can meaningfully reduce annual taxable income from RMDs during that period.
What QLACs are not
QLACs are not variable annuities and they are not indexed annuities. They are simple, insurance-based contracts with a fixed, guaranteed payout that begins at a specified future date. There is no market exposure, no investment account, and no cash value.
The trade-off for the longevity guarantee is that the premium is illiquid — you give up flexibility in exchange for the future guaranteed income stream. Most QLAC contracts do include a death benefit option (return of premium if you die before payments begin), but adding this feature reduces the income payout.
Who QLACs tend to fit
Based on our experience with South Jersey retirement income planning, QLACs tend to be worth exploring for:
- Retirees with significant pre-tax IRA or 401(k) balances who want to reduce RMDs without doing Roth conversions
- Retirees with strong family longevity who are genuinely concerned about income in their 80s
- Retirees whose other income sources (Social Security, pension, portfolio withdrawals) cover near-term needs but leave uncertainty in very late life
- Retirees who want a guaranteed income floor at advanced ages without purchasing a full immediate annuity today
The WealthCare perspective
We treat QLACs as a component of the retirement income architecture — not a standalone purchase. Before recommending a QLAC, the WealthCare Process models the interaction between the QLAC premium, the resulting change in RMD exposure, the projected income need at the QLAC start date, and the trade-off in portfolio liquidity.
For clients who read Marty Higgins’ book Distributionland, the concept of structuring retirement income across multiple buckets and time horizons is familiar. A QLAC addresses the longest bucket — the segment of retirement beyond your reasonable planning horizon.
What to do next
If you have a large IRA balance and are concerned about either RMD-driven taxes or very late-life income security, a QLAC analysis is worth adding to your next WealthCare consultation. Call (856) 988-7722 or visit familywealthadvisory.com.