A 71-Year-Old With $600,000 in an IRA Parked $150,000 in a QLAC. Her RMDs Dropped by a Quarter, and the Check Starts at 85.
Moving a chunk of an IRA into an obscure annuity contract before required distributions kick in can shrink those future tax bills in a mathematically predictable way, but the trade comes with a catch most retirees never think through until…
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A 71-year-old retiree with $600,000 in a traditional IRA moved $150,000 into a Qualified Longevity Annuity Contract, or QLAC, with income scheduled to begin at age 85. She has not yet started required minimum distributions. The move is expected to reduce those future RMDs by roughly a quarter. The mechanics behind that reduction and the trade-offs involved are worth walking through in plain language.
What a QLAC Actually Is
A QLAC is a specialized type of deferred income annuity that you buy inside a tax-qualified account like a traditional IRA or 401(k). A deferred income annuity, in plain terms, is a contract where you hand over a premium today in exchange for guaranteed payments that start at a future date and last for life. The QLAC label itself comes from a set of IRS rules that allow the contract’s value to sit outside the balance used to calculate your required minimum distributions, as long as the contract checks every box those rules lay out. RMDs, for context, are the mandatory annual withdrawals the IRS requires from most pre-tax retirement accounts once you hit your required beginning date, which is the first age at which those withdrawals become compulsory.
Why the Timing at 71 Works
Under SECURE 2.0, a person born between 1951 and 1959 has a required beginning date of age 73. A retiree who is 71 today has not started RMDs yet, so buying the QLAC before the first mandatory withdrawal is the planning window most advisors point to. The premium leaves the IRA balance before that balance is ever used to size an RMD.
Where the “Quarter” Comes From
RMDs are calculated by dividing the prior year-end IRA balance by a life expectancy factor from the IRS Uniform Lifetime Table. QLAC assets are excluded from that balance during the deferral period. That is the entire mechanism. If a retiree with $600,000 shifts $150,000 into a QLAC, the balance used to compute the RMD shrinks by the same proportion as the premium represents of the original account. The RMD drops in that same proportion. The account divisor is simply applied to a smaller number, so the retiree’s income itself is unchanged by the mechanics.
Premium Limits and the Age 85 Ceiling
SECURE 2.0 replaced the earlier percentage-of-balance cap with a flat dollar limit indexed to inflation, which the IRS set at $210,000. That cap applies per person across all retirement accounts, meaning the $150,000 premium in this scenario sits comfortably within current limits. QLAC rules also require that payments begin no later than the first day of the month following the owner’s 85th birthday, which matches the start date in the headline.
What the Rate Environment Looks Like
Annuity payouts are shaped by long-term interest rates, insurer pricing, mortality assumptions, and contract features. The 10-year Treasury yield stood at 4.67% on August 27, 2026, and the federal funds target upper bound sat at 3.75% as of August 30, 2026. For comparison, the FDIC national average 12-month CD rate was 1.71% on August 1, 2026, though top online banks pay multiples of that average. The 2027 Social Security COLA is tracking toward 3.1%, which matters because most QLAC payments are level unless you purchase an inflation rider.
Key Caveats
- Illiquid. The $150,000 is committed. It is not available for a medical event, long-term care, or an emergency during the deferral period.
- Insurer credit risk. The guarantee depends on the issuing insurer’s solvency. State guaranty association coverage exists but is limited and varies by state.
- No market participation. The premium does not grow with equity or bond markets during deferral.
- Inflation erosion. Payments are typically level. A rider for cost-of-living adjustments can be added, but it lowers the initial check.
- Mortality risk. Dying before age 85 can leave heirs with little unless a return-of-premium feature (a rider that refunds unpaid premium to a beneficiary) is elected at purchase.
- Tax deferral only. Payments count as ordinary taxable income when they begin.
Reading the Trade
The retiree in this scenario is trading liquidity and market exposure on a slice of her IRA for a smaller RMD in her 70s and early 80s and a guaranteed check starting at 85. The reduction in RMDs is a mechanical outcome of removing the premium from the balance the IRS formula sees. Shrinking that balance years before the first mandatory withdrawal is the same idea behind our free guide to defusing the RMD tax bomb, which walks through the moves that work before the required beginning date arrives. Whether the QLAC trade is worth it depends on health, other income sources, heirs, and the quotes available from insurers at the time of purchase.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
