556 / What is a qualified longevity annuity contract (QLAC)? What steps has the IRS taken to encourage the purchase of QLACs?

In the usual case, if a deferred annuity is held in a retirement plan, the value of that contract is included in determining the amount of the account owner's required minimum distributions (RMDs).² One of the primary benefits of a QLAC is that the IRS' rules allow the value of the QLAC to be excluded from the account value for purposes of calculating RMDs.³ Because including the value of a QLAC in determining RMDs could result in the taxpayer being forced to begin annuity payouts earlier than anticipated if the value of his or her other retirement accounts has been depleted, the IRS determined that excluding the value from the RMD calculation furthers the purpose of providing taxpayers with predictable retirement income late in life.⁴

Under the SECURE Act 2.0, plans may implement a "free-look period" of up to 90 days, during which the taxpayer can rescind the purchase of the QLAC without penalty.

The amount that a taxpayer can invest in a QLAC and exclude from the RMD calculation was limited, however, to the lesser of $145,000 (as adjusted for inflation in 2022, the amounts were $130,000 for 2018-2019 and $135,000 for 2020-2021) or 25 percent of the taxpayer's retirement account value.⁵ Beginning in 2023, the limitations for QLAC investments was increased. It is $210,000 in 2025-2026 ($200,000 for 2023-2024).⁶ The 25 percent limitation was removed under the SECURE Act 2.0. The regulations clarify that a taxpayer is not required to exchange an existing QLAC for a new contract to take advantage of the higher dollar limitations. Taxpayers are permitted to add funds to an existing QLAC.

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Planning Point: This is a per-person limit, meaning that a married couple in 2026 could potentially shelter $420,000 from RMDs via QLACs.
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The 25 percent limitation was removed under the SECURE Act 2.0. The regulations clarify that a taxpayer is not required to exchange an existing QLAC for a new contract to take advantage of the higher dollar limitations. Taxpayers are permitted to add funds to an existing QLAC.

Prior to the SECURE Act 2.0, final regulations provided that the 25 percent limit was based upon the account value as it existed on the last valuation date before the date upon which premiums for the annuity contract were paid. This value was increased to account for contributions made during the period that began after the valuation date and ended before the date the premium was paid. The account value was decreased to account for distributions taken from the account during the same period.⁷

To qualify as a QLAC, the annuity contract must also provide that annuity payouts will begin no later than the first day of the month following the month in which the taxpayer reaches age 85.⁷ Variable annuities, indexed annuities and similar products may not qualify as QLACs unless the IRS specifically releases future guidance providing otherwise.⁸ Further, a QLAC cannot provide for any commutation benefit, cash surrender value or similar benefit.⁹

Taxpayers also have the option of choosing a joint payout option to benefit a surviving spouse or a lump sum distribution to beneficiaries if the QLAC payments are never needed. Once QLAC payments begin, the amounts are subject to ordinary income tax just like any other traditional retirement account distribution.

The SECURE Act 2.0 clarified that if the QLAC was purchased with joint and survivor annuity benefits for the individual and a spouse, and assuming that the contract was permissible under regulations in place at the time of purchase, a divorce occurring after the original purchase and before annuity payments begin will not impact the permissibility of the joint and survivor annuity benefits. Further, the divorce will not impact any other benefits under the contract (or require any adjustment to the amount or duration of the benefits).

That is the case provided that a qualified domestic relations order (QDRO) either (1) provides that the former spouse is entitled to the survivor benefits under the contract, (2) provides that the former spouse is treated as a surviving spouse for purposes of the contract, (3) does not modify the treatment of the former spouse as the beneficiary under the contract who is entitled to the survivor benefits, or (4) does not modify the treatment of the former spouse as the measuring life for the survivor benefits under the contract.

The 2024 final SECURE Act RMD regulations also provide guidance on situations where a QLAC is exchanged for another QLAC. The regulations provide that, for purposes of the limit on premiums used to purchase a QLAC, if another insurance contract is exchanged for a QLAC, the fair market value of the exchanged contract is treated as a premium paid for the QLAC. The final regulations also provide that if an insurance contract is surrendered for its cash surrender value, the surrender extinguishes all benefits and other characteristics of the contract, and the cash is used to purchase a QLAC, only the cash from the surrendered contract is treated as a premium paid for the QLAC.

1. 2012-13 IRB 598.

2. Treas. Reg. § 1.401(a)(9)-6, A-12.

3. IRC § 401(a)(9).

4. 2012-13 IRB 598.

5. 2012-13 IRB 598.

6. Notice 2025-67, Notice 2024-80, Notice 2023-75, Notice 2022-55.

7. Treas. Reg. §1.401(a)(9)-6, A-17(d)(1)(iii).

8. Treas. Reg. § 1.401(a)(9)-6, A-17(a).

9. Treas. Reg. § 1.401(a)(9)-6, A-17(a)(7).

10. Treas. Reg. § 1.401(a)(9)-6, A-17(a)(4).