Want to (legally) put off some RMDs? The QLAC can help — and we asked 4 money pros who should, and should not, use it

Typically, you hit 73 and are forced to take required minimum distributions from your traditional retirement accounts — whether you want the money or not. Sometimes, those RMDs can even mean a higher tax bill.

Plenty of people would prefer to delay taking some of those RMDs. Enter the qualified longevity annuity contract, or QLAC. You use some of the money in your retirement account to buy this deferred income annuity; it provides you with guaranteed income starting somewhere between ages 75 and 85. The money you used to buy the QLAC doesn’t count towards the balance in calculating your RMDs. They’re complicated, and pros say it’s likely best to work with a financial adviser if you’re considering one. You can use this free tool from our partner SmartAsset that can match you to a fiduciary adviser, as well as resources like NAPFA and the CFP Board.

“A QLAC allows part of a portfolio to move from ‘growth and taxation’ to ‘future certainty’ — while also reducing RMDs and therefore income taxes from age 73-85,” says Jack Elder, director of advanced markets at CBS Brokerage. The lifetime individual limit for a QLAC is $210,000.

But while they can indeed provide a guaranteed income stream, pros say a look at your long-term financial plan is critical before deciding whether or not to open one. “If you need quick access to your money or want full liquidity, this isn’t the strategy for you because the funds are locked up in an annuity and only come back out in the form of income payments,” says Trevor Houston, CEO at ClearPath Wealth Strategies.

We asked financial pros how QLACs can be beneficial to your income strategy for later in life, who they’re right for — and who doesn’t need them.

‘QLACs shine for clients with between $500,000 and $1.5 million in qualified assets who are healthy, longevity-minded and interested in deferring income,’ says Jack Elder, director of advanced markets at CBS Brokerage.

“QLACs shine for clients with between $500,000 and $1.5 million in qualified assets who are healthy, longevity-minded and interested in deferring income until age 85 as a form of longevity insurance… If your qualified plan balances are too low you can’t afford the defer. If the account balance is too high (thereby driving up RMDs) the impact of the deferral on RMD tax savings are not meaningful… These clients often benefit from staying below key income thresholds that affect Medicare premiums and Social Security taxation. For them, the QLAC is both a tax strategy and a retirement income tool.

QLAC’s can reduce taxable income in a retiree’s 70s, potentially lowering Medicare premiums. Advisors often pair QLACs with Roth conversions to shift assets into tax-free territory, partial annuitization to cover essential expenses, and bucketing strategies that segment retirement income by time horizon and risk.

QLACs aren’t a fit for everyone. They’re generally not suitable for clients who need liquidity from their retirement accounts, since once the QLAC is purchased, dollars are locked in until income begins — often years later QLACs also tend to be a poor fit for clients with serious health concerns or shorter life expectancy, as those retirees may not live long enough to receive substantial income.”

‘The QLAC operates at its best when it functions as part of a complete long-term income planning approach instead of being chosen as an independent solution,’ says Trevor Houston, CEO at ClearPath Wealth Strategies.

“I explain to my clients that QLACs are about income through scheduled payments rather than chasing returns. Once you hit your early 70s, the IRS requires you to start taking distributions from your qualified retirement accounts, whether you need the money or not. And for people who don’t need that income right away, a QLAC lets you defer taxes on a portion of your IRA or 401(k) until age 85. That extra time can help lower your tax bill today and stretch your savings further.

It tends to make the most sense for people whose income is fully funded through their early retirement years, maybe through Social Security, a pension, or other assets, and want a guaranteed ‘paycheck for life’ in their 80s and beyond. It’s also important to understand that while delaying payments may result in higher income, those payments may not always keep up with inflation over time. The QLAC operates at its best when it functions as part of a complete long-term income planning approach instead of being chosen as an independent solution.”

‘This type of annuity would allow folks the opportunity to take a portion of their retirement savings and annuitize payments beginning later in life,’ says Myles McHale, president and founder of Wealthcare Advisers and SVP and adjunct professor at Cannon Financial Institute.

“Survey after survey continues to tell us that retirees’ and / or soon to be retirees’ No. 1 fear is running out of money. With the QLAC, they have a chance to prevent this fear from materializing. This type of annuity would allow folks the opportunity to take a portion of their retirement savings and annuitize payments beginning later in life. The funds allocated to the QLAC are not subject to the volatility of the capital markets.

Said differently, you have removed daily market fluctuations from your retirement equation and replaced them with a stable and predictable future income source. It’s important to know that this stability does come at a cost as you have dramatically limited your upside growth potential.

Similar to decisions regarding claiming of Social Security benefits, the individuals with health issues and shortened expected lifespans should not consider QLAC as part of their retirement solution. Often when a person passes away, the money may be lost due to errors, unless a death beneficiary writer gets involved which is optional and costly.”

‘If your only goal is to limit RMDs, a QLAC is probably not the right strategy,’ says Tyler End, certified financial planner and co-founder of Retirable.

“If you use a traditional IRA to purchase a QLAC, that amount is excluded from your RMD calculation. When the annuity payments begin at age 80, you’ll pay taxes on those distributions, but your RMDs from age 73 to 80 will be lower.

If your only goal is to limit RMDs, a QLAC is probably not the right strategy. However, retirement comes with many risks: market risk, inflation risk, health cost risk and more. You can mitigate one of your risks, longevity, by setting aside part of your savings for a QLAC. This should be done as a part of a holistic financial plan, which considers your risk of outliving your savings, your personal health history, and your family’s longevity history.

QLACs are good for anyone who is concerned about outliving their savings and wants to consider the impact of buying an annuity. They are best suited for people who have enough assets to set aside without needing immediate access, who want to manage longevity risk as part of a broader financial plan, and who are in good health with a long enough life expectancy to benefit from deferred payments. They are not a great fit for people with limited savings who can’t lock up money for the future, people who have a health history suggesting a shorter lifespan, or for individuals who have sufficient fixed income throughout their lifetime.”