After decades of building savings in a traditional individual retirement account, retirement may finally be within reach. But once retirees reach the required minimum distribution age, currently 73 for those born 1951–1959 and rising to 75 for those born in 1960 or later, the Internal Revenue Service requires annual withdrawals from those accounts, regardless of whether the funds are needed for everyday expensesThose mandatory withdrawals, known as required minimum distributions, generate taxable income that can push retirees into a higher tax bracket and increase Medicare premiums. For retirees who can cover their bills without tapping the full distribution, Fidelity notes that forced withdrawals generate taxable income they did not need to draw.Fidelity Investments outlines a strategy that removes a portion of the IRA balance from the withdrawal formula and converts it into guaranteed lifetime income. The income stream begins on a future date chosen in advance, potentially as late as age 85, when retirement savings may come under the greatest financial pressure.How a qualified longevity annuity contract redirects IRA dollarsA qualified longevity annuity contract is a deferred income annuity funded with assets from a traditional IRA or an eligible workplace plan, as explained by Fidelity. A lump-sum payment is transferred to an insurance company, which provides guaranteed lifetime income beginning on a date selected in advance.The Treasury Department created the QLAC designation in 2014, resolving a conflict between deferred annuities and the distribution rules governing retirement accounts. Once funded, the transferred amount is excluded from the IRA balance that the IRS uses to calculate your annual required distribution.No income tax is owed on those funds until annuity payments begin, which could occur a decade or more after the original purchase.”The creation of the QLAC has opened up the opportunity to defer income past someone’s RMD starting age, using tax-deferred savings like an IRA or 401(k),” Tom Ewanich, vice president and actuary at Fidelity Insurance Agency, explained in the firm’s guidance.SECURE 2.0 raised the QLAC funding cap and simplified the mathBefore SECURE 2.0 took effect, the funding rules required retirees to calculate both a dollar ceiling and a percentage cap, then apply the smaller of the two.The legislation eliminated the old 25% restriction and replaced both limits with a flat $210,000 lifetime maximum for 2026, indexed to inflation, Fidelity reported.More Fidelity:Fidelity offers a lifeline to millions before Social Security shiftsFidelity flags major 401(k), IRA shift as Americans struggleFidelity cuts to the chase on 401(k) best practicesThat ceiling applies to each individual rather than to each household, so a married couple could shelter up to $420,000 from early-distribution taxation. Each spouse would need to fund a separate contract using assets from their IRA or eligible workplace plan, PlanEasy noted.Additional contributions may be made up to the $210,000 limit if a QLAC was funded below the current cap in a previous year, Fidelity confirmed.
SECURE 2.0 made QLACs more powerful by raising contribution limits, simplifying rules, and helping retirees reduce early RMD tax exposure.Igor Suka/Getty Images
Fidelity projects $40,440 a year from a $210,000 QLACFidelity’s working scenario features a 70-year-old woman who does not need her full RMD and transfers $210,000 from her traditional IRA into a QLAC.She selects an income start date at age 80, and her guaranteed annual payment would come to $40,440 regardless of market conditions, Fidelity calculated.Aamir M. Chalisa, MBA, LUTCF, LACP, MDRT, general manager at Futurity First Insurance Group’s Oak Brook branch, said retirees who fit the Fidelity projection profile are usually those who explicitly want to sidestep market volatility.Qualified longevity annuity contracts can provide a cost-effective solution for retirees who are willing to use part of their savings to protect against outliving the rest of their assets. There have been times when one of my conservative investors, who wants no market risk and wants to avoid taxes, has opted for a QLACIf the woman lived to 95, her cumulative payments would reach $606,599, and the total would continue to grow with every additional year of life. During the deferral period, she would rely on Social Security, distributions from her remaining IRA balance, and other income sources to cover daily expenses.How a QLAC fits into a broader retirement income strategyFidelity frames the QLAC as one layer of a diversified income plan, not as a standalone replacement for traditional retirement savings and investment withdrawals. The firm’s guidance recommends ensuring that housing, healthcare, and food costs are covered by guaranteed lifetime income sources before allocating IRA assets to an annuity.”A QLAC would allow you to enjoy your earlier retirement years knowing that you have a guaranteed income in place that starts later in retirement when you really might need it,” Ewanich said.Ewanich recommends making the purchase decision before reaching the age at which required distributions begin, since timing the contract to your strategy matters, Fidelity reported. Kevin Dyreson, a senior director of insurance solutions at Northwestern Mutual, noted that the QLAC appeals most to retirees with sufficient liquid savings.Setting aside up to $210,000 in a deferred contract should not disrupt daily expenses for those with ample wealth outside the annuity, Dyreson indicated. Most modern QLACs offer a return-of-premium death benefit, paying beneficiaries the original premium if the holder dies before income payments begin, PlanEasy noted.Related: Your IRA needs urgent attention 5 years before retiring