A $2 Million 401(k) Can Quietly Trigger a 40% Tax Rate on RMDs. Here’s How to Stop It

A 70-year-old sitting on a $2 million traditional 401(k), with no pressing need to tap the account and three years before required minimum distributions kick in at 73, is looking at a compounding tax problem. A QLAC (qualifying longevity annuity contract) purchased for $200,000 could pay roughly $42,704 per year starting at age 85, and that money exits the RMD calculation the moment it is funded.

The real value shows up in what happens to your RMD schedule, your Medicare premiums, and your tax bracket the year you carve $200,000 out of the qualified pile. The contract starts working the day it is issued.

How the RMD Math Actually Changes

Under SECURE 2.0, the 2026 QLAC premium cap is $210,000 per person, indexed for inflation and no longer limited to 25% of your account balance. A $200,000 purchase fits comfortably under that ceiling. Each spouse who holds qualifying retirement accounts can fund a separate QLAC up to the same limit, so a married couple can shelter as much as $420,000 combined from RMD calculations. Once the contract is issued, that premium is excluded from the balance the IRS uses to compute your annual RMD until QLAC payments begin, which can be deferred as late as the first of the month after your 85th birthday.

At 73, the Uniform Lifetime Table divisor is 26.5. On a $2 million balance, your first RMD is roughly $75,500. Move $200,000 into a QLAC and the RMD calculation runs on $1.8 million instead, producing about $67,900. In year one alone, that defers roughly $7,500 of forced income. Repeat the benefit every year from 73 through 84, as the divisor shrinks with age, and cumulative deferred RMDs comfortably clear $150,000.

The Tax Cascade That Makes This Worth Doing

The reason this matters extends well beyond the withdrawal amount itself.

The 2026 IRMAA thresholds begin at $109,000 in modified adjusted gross income for a single filer and $218,000 for joint filers. Cross the first tier and Medicare Part B premiums jump above the standard $202.90 monthly base, with a two-year lookback that makes the sting feel retroactive. Above those same income levels, up to 85% of Social Security benefits become taxable. A retiree in the 22% federal bracket who nudges past the IRMAA cliff and pulls Social Security into the taxable zone can face an effective marginal rate near 40% on the next RMD dollar.

Trimming $7,500 off that first RMD, and progressively more in later years as the divisor tightens, can keep your income below the IRMAA threshold. That bracket protection is the real product a QLAC sells. Guaranteed lifetime income starting at 85 is the bonus.

Is the QLAC Rate Actually Competitive Right Now?

QLAC payouts track the long end of the Treasury curve, and the long end is currently at multi-year highs. The 10-year yield is running near 4.79%, its highest level since October 2023, and the 30-year has reached 5.27%, giving insurers ample room to price 15-year deferred income aggressively. The Fed funds effective rate sits at 3.63%, with markets pricing in roughly a 53% probability of a rate hike at the September FOMC meeting, so the pricing environment for a QLAC quoted today is notably higher than it was even a few months ago.

For context on alternatives: the national 12-month CD average is 1.71%, and the current I-bond composite rate is 4.26% for bonds issued May through October 2026. A QLAC priced at roughly 20% annual payout of the premium at age 85 is drawing on mortality credits, a return driver no liquid savings instrument can replicate. Part of each annuitant’s payout comes from the pooled premiums of buyers who die before payments begin, which is exactly why the math favors those who expect to live well into their late 80s.

What to Do This Week

1. Pull three real QLAC quotes. Request them from a fee-only broker or a platform like immediateannuities.com or Blueprint Income. Compare annual income at 85, cash refund versus life-only, and whether joint life coverage makes sense for your household. Rates shift with Treasury yields, so a quote from even a few weeks ago may no longer reflect current pricing.
2. Model your MAGI for the year Medicare uses in its two-year lookback. If your projected age-73 income sits within $10,000 of the $109,000 single or $218,000 joint IRMAA threshold, the QLAC’s RMD-shrinking function is worth more than its lifetime income promise. Work backward: the year you turn 73 is the year that lands in the IRMAA calculation two years later, which means age 71 is when income discipline has the most leverage.
3. Coordinate with Social Security timing and the 2026 COLA. The 2.8% adjustment is already flowing through checks, and layering a $50,000-plus annual QLAC payment on top of that at 85 will push most retirees firmly into taxable-benefit territory. Use your 70s, while the RMD base is smaller, to run Roth conversions and reduce the eventual taxable pool.

Editor’s note: This update corrects the 10-year Treasury yield to 4.79% and the 30-year yield to 5.27%, both near multi-year highs as of early September 2026; updates the Fed funds effective rate to 3.63% and notes markets are pricing in a possible September hike; refreshes the national 12-month CD average to 1.71% (FDIC); and adds the SECURE 2.0 married-couple QLAC context, under which each spouse can shelter up to $210,000 for a combined $420,000 maximum.

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