Postpone RMDs with a Deferred Income Annuity (QLAC)

Most retirees don’t need to tap their IRA accounts early in retirement. Yet, required minimum distribution (“RMD”) rules force them to begin taking money from their IRAs as soon as they reach age 70-1/2.

If you’re in this situation and you want to avoid taking some RMDs until much later in retirement there now is an annuity strategy you can follow. It’s called the Qualifying Longevity Annuity Contract or QLAC.

In July, 2014, the IRS approved the purchase of QLACs in IRA accounts. With a QLAC you can delay taking RMDs from your IRA for up to 15 years, to as late as age 85. By delaying RMDs you gain a significant tax advantage.

What exactly is a QLAC?

A QLAC is a new breed of longevity annuity (also known as deferred income annuity). You set up a QLAC by transferring money from any of your existing IRA or 401k accounts to an insurance company annuity. Your QLAC is designed to pay you a steady monthly income later in life.

The annuity that makes up a QLAC isn’t a new idea. Longevity annuities have been around for years. But the way the IRS now treats a longevity annuity within a tax-deferred retirement account, such as an IRA or 401(k), has changed.


Before we delve into the details, let’s first explain how a QLAC longevity annuity works. This is an annuity in which you pay a lump sum premium to an insurance company and then at a future date which you specify today, you begin receiving a guaranteed monthly payout amount that continues for as long as you (or your spouse) are alive.

The beauty of the longevity annuity is that the insurance company tells you today exactly how much income you will begin receiving in the future. There is no stock market or interest rate risk. The future income amount that’s quoted is guaranteed!

With a longevity annuity you get income security that starts in your old age and at an attractive price. Financial planners estimate that if you own a longevity annuity you can increase the amount you withdraw from your savings in the early years of retirement by as much as 30% because of the reassurance in knowing your income in later retirement is guaranteed by the annuity.

Another appeal of QLACs is that they are straightforward and transparent. They are easy to understand, they require only one upfront payment and have no annual fees.