What Is a QLAC? Here’s How It Works

Kevin Dyreson is a senior director of Insurance Solutions at Northwestern Mutual.

If you’ve saved well for retirement, you may find you’ve been able to cover your living expenses so far without touching your qualified accounts. But if age 73 is quickly approaching, you’ll soon need to take required minimum distributions (RMDs) from your qualified retirement accounts—even if you don’t need them.

If you don’t need your full RMDs, you might want to consider a qualified longevity annuity contract (QLAC): a type of annuity that allows you to get more value out of your retirement savings by continuing to delay owing taxes.

Read on to understand the basics of a QLAC and how it works so you can decide whether it has a place in your retirement savings plan.

What is a QLAC?

A QLAC is a type of deferred income annuity, which allows you to make a lump sum payment (or a series of payments) in exchange for guaranteed income in retirement. With this type of annuity, you use funds from a qualified retirement account—like a traditional 401(k), traditional IRA, 403(b), 457(b), SEP IRA or SIMPLE IRA—to purchase the annuity. Doing so offers a few key benefits: You’re able to delay when you’ll need to take required minimum distributions from these dollars, and you’ll guarantee that you’ll receive an income as long as you live (even if your savings run out).

Who is the best candidate for a QLAC?

At Northwestern Mutual, anyone between the age of 18 and 75 can purchase a QLAC, but there may be some people that this annuity makes more sense for. If you’re looking to avoid market risk and ensure a steady, guaranteed income later in retirement, a QLAC is probably a good fit for you. If you also have concerns about the longevity of your savings and having enough money to fund needs later in life (like medical expenses or long-term care), you could benefit from a QLAC.

How does a QLAC work?

If you have a qualified retirement account, you may need to begin taking RMDs, or withdrawing money (and paying taxes on that money), beginning at age 73.* One way to avoid doing this is to use pre-tax funds in your qualified account (up to $210,000) to purchase a QLAC, which will guarantee that you receive regular payments for as long as you live.

Once you purchase a QLAC, you’ll be able to delay distributions on those funds until the payout date of your QLAC (which will be no later than your 85th birthday). You’ll also reduce the total amount in your retirement account, which will result in smaller RMDs and, therefore, a lower income. A lower income can actually be a good thing in retirement, because it could put you in a lower income tax bracket—meaning lower income tax liabilities and a reduced Medicare premium.

When purchasing a QLAC, you’ll be able to choose your payout date—or when you’ll begin receiving payments. As with Social Security, the longer you wait to receive payments, the higher the payments will be. Once you reach the payout date, you’ll receive regular monthly payments for the rest of your life. If you purchased a joint QLAC, your spouse would continue to receive regular payments after you pass (and vice versa).

QLAC contribution limits

In 2023, updates to the SECURE 2.0 tax law changed the QLAC limits. Now, in 2025 you’re able to use up to $210,000 from a qualified retirement account to purchase a QLAC. (Prior to 2023, you were limited to either $145,000 or 25 percent of your account balance, whichever was lower.)

The $210,000 limit is a lifetime limit that applies to all your retirement accounts and includes any QLAC contracts you purchase; you can spend only $210,000 total, even if you draw from multiple accounts and purchase multiple contracts. This limit is also per individual, so both you and your spouse are each able to spend $210,000. (A good way to take advantage of this is to buy a joint annuity that covers you both.) It’s likely the limit will continue to increase as the cost of living rises.

How are QLAC distributions taxed?

QLACs are purchased with pre-tax dollars that you’ve put into retirement savings, so once you withdraw money from the QLAC, you’ll need to pay income taxes on it. However, a QLAC can be an efficient tax planning strategy to help you lower your tax burden on your retirement savings. For example, by using $100,000 of your traditional IRA to purchase a QLAC before age 73, you’ll reduce the balance of your IRA by $100,000, which will lower the amount you’ll need to take out for RMDs. The lower your RMD, the lower your income will be, which will reduce your tax liabilities.

Does a QLAC count toward RMDs?

The retirement funds you use to purchase a QLAC do not count toward your required minimum distributions. However, in using them to purchase a QLAC, you’ll be able to defer taking distributions from those funds until age 85 (vs. 73).

What is the average QLAC payment?

QLAC payments can vary depending on the terms of the QLAC contract. Here are some factors that can impact the monthly payment amount:

• Payout date: How long you choose to wait to receive regular payments can increase or decrease the monthly payment amount. As with Social Security, the longer you wait, the higher the monthly payment you’ll be eligible to receive.
• Payment amount: The more you put toward a QLAC, the more you’ll receive in the future.
• Life expectancy: Because a QLAC is paid out as long as you live, how long you may live can have an impact on your monthly payment. Because women generally live longer than men, women are often eligible for a lower monthly payment amount.

Do QLACs have a death benefit?

Because you’re setting aside funds for later in life, some people worry that the insurance company will keep all their money if they die too soon. But it’s possible to get annuities that include a death benefit, allowing your heirs to receive some or all of what you paid into an annuity if you die before getting your payments out.

QLACs typically have the option to either receive no death benefit or receive a return of premium, which means your beneficiaries would get back the amount you contributed to the QLAC less any distributions.

What’s the difference between a QLAC and an annuity?

Because a QLAC is a type of annuity, there are many similarities between the two. For both a QLAC and an annuity, the purchaser pays an amount of money in exchange for a guaranteed regular payment while still alive. When purchasing a QLAC, you’ll select a date in the future at which you’ll begin receiving payments, whereas some fixed annuities begin to pay not too long after a contract is signed. Other deferred income annuities usually tend to be much more flexible than a QLAC—with fewer limitations—but they don’t come with the benefit of an RMD extension.

Pros and cons of QLACs

A QLAC can be a helpful component of a retirement plan, but whether to purchase one is an individual choice based on what other assets make up your retirement plan and other personal factors. When considering a QLAC, here are some pros and cons to consider.

What are the benefits of a QLAC?

A QLAC can provide security and steady income later in retirement. Once funds are removed from your retirement account and put toward a QLAC, they’re no longer subject to market fluctuations. Though this means your funds won’t participate in market growth anymore, it also means they won’t be subject to market losses. Once you begin receiving payments, you’ll receive a consistent payment as long as you live. (Because a QLAC carries such low risk, you may also have more room to invest or spend down other funds more aggressively.)

Another major benefit of a QLAC is its tax impact on your retirement account. By lowering the overall balance of the account, you’ll be subject to lower RMDs, which can lower your tax bracket and lower tax payments on distributions in earlier years of your retirement.

What is the downside of a QLAC?

Though a QLAC can give you peace of mind later in retirement, it may not be as flexible as other products. Once you purchase a QLAC, you will not have access to those funds until you begin taking payments. Many QLACs are also irrevocable, so you’re not able to go back on the agreement if you change your mind.

As with many annuities, the payments are designed to last for as long as you live. This helps to manage the risk that you could run out of retirement funds if you live longer than expected. But it also means that you and your family may have less if you die sooner than you expect.

Is a QLAC is right for you?

There is no one-size-fits-all retirement plan or retirement product. How much you need for retirement and how you build your plan truly depends on what you’ve earned throughout your lifetime, how you’ve saved those earnings, what you’re hoping to do with those earnings, and what your values are. A good retirement plan will also typically contain a combination of assets that work well with one another to help you live the life you want in retirement. A QLAC may be one of those assets, but there are other assets you may want to consider, too.

If you’re considering a QLAC, your Northwestern Mutual financial advisor can help walk you through how it can impact your retirement plan and make recommendations about when to purchase a QLAC or how much to put toward one. The advisor can also help by showing you how your assets can provide you with security and peace of mind in retirement.

*Some employees with qualified plans will not begin taking RMDs at age 73 if they are still working and are not more than 5% owner of the business that established the plan.

This material does not constitute tax or legal advice. Please consult with a tax or legal professional for advice about your specific situation.