QLAC: Deferring $200,000 in 401(k) RMDs Beyond 85

Understanding the Power of a QLAC in Retirement Planning

A Qualified Longevity Annuity Contract (QLAC) is a powerful tool that can significantly impact your retirement strategy. For instance, purchasing a $210,000 QLAC can reduce the required minimum distribution (RMD) from a $2.32 million balance by $7,924 annually, saving approximately $1,900 in taxes each year. This strategic move not only helps manage tax liabilities but also provides long-term financial security.

The Importance of RMD Projections

For a 70-year-old retiree with a $2 million traditional 401(k), the RMD calculations become crucial as they approach age 73. If the account balance grows at 5%, it could reach around $2.32 million by that time. Using the IRS Uniform Lifetime Table divisor of 26.5, the first RMD would be roughly $87,547. This amount could push a single filer into the 24% federal tax bracket and potentially exceed the second IRMAA threshold for Medicare premiums.

How QLACs Work to Reduce RMDs

QLACs are deferred income annuities purchased within a 401(k) or IRA. The funds used to buy them are excluded from the RMD calculation. Annuity payments must start no later than age 85, providing a guaranteed income stream during the later years of retirement.

The SECURE 2.0 Act has updated the rules, removing the previous cap of 25% of the account or $145,000. Now, the limit is $210,000 per person across all eligible retirement accounts, adjusted annually for inflation. This increase makes QLACs more accessible for retirees looking to optimize their RMD strategies.

The Math Behind a QLAC

By moving $210,000 of a projected $2.32 million balance into a QLAC at age 70, the RMD calculation at 73 would be based on $2.11 million instead of $2.32 million. This adjustment reduces the first-year RMD to about $79,623, resulting in an annual savings of $7,924. Over twelve years, this could lead to cumulative tax savings of approximately $22,800 before the QLAC begins paying out.

The Medicare Advantage of QLACs

One often-overlooked benefit of QLACs is their impact on Medicare premiums. The 2026 standard Part B premium is $202.90 per month, but surcharges apply for single filers with modified adjusted gross income above $109,000. An RMD of $87,000 combined with other income could push a retiree into the second IRMAA tier, increasing monthly premiums significantly. By reducing the RMD, a QLAC can help avoid these surcharges, offering substantial savings.

The Role of Interest Rates in QLAC Payouts

Annuity payouts are influenced by long-duration Treasury yields. With the 30-year Treasury yield near 5% and the 10-year at 4.4%, current rates are favorable for QLACs. Insurers use these benchmarks to price guaranteed income, making today’s purchases advantageous compared to previous years.

Key Steps for a 70-Year-Old Retiree

1. Run RMD Projections: Calculate the unmitigated RMD number by dividing the projected balance at 73 by 26.5. If the result exceeds $109,000 for a single filer or $218,000 jointly, consider a QLAC.

2. Get Multiple Quotes: Compare offers from at least three A-rated insurers. Payout rates vary, and married couples should evaluate single-life versus joint-life options.

3. Coordinate with Tax Projections: If your MAGI is close to an IRMAA threshold, the surcharge avoidance alone can justify consulting a fee-only advisor. Pairing the QLAC with a Qualified Charitable Distribution plan may further enhance benefits.

Conclusion

QLACs offer a unique combination of longevity protection and tax efficiency. For retirees with significant traditional balances, leveraging a QLAC can provide both financial security and strategic advantages in managing RMDs and Medicare premiums. As interest rates remain favorable, now is an opportune time to explore this option.