QLAC Strategy: How to Hide $200k from RMDs and Insure Against Living Too Long
QLAC Strategy: How to Hide $200k from RMDs and Insure Against Living Too Long
EXECUTIVE SUMMARY
- The Mechanism: A Qualified Longevity Annuity Contract (QLAC) allows you to take up to $200,000 from your IRA/401(k) and defer its distributions until age 85. It essentially “pauses” the tax clock on that portion of money.
- The Tax Alpha: By removing $200k from your IRA balance, you lower your Required Minimum Distributions (RMDs) starting at age 73. This creates “Tax Space” to perform other maneuvers (like Roth Conversions) without bumping into higher brackets.
- The Risk: QLAC is longevity insurance. If you die at 75, the “mortality credits” usually stay with the insurer (unless you buy a Return of Premium rider). It is a bet that you will live to 95.
Living to age 95 is a financial risk. Dying with too much money in an IRA is a tax risk. The QLAC solves both. Under the Team BMT Wealth Preservation Protocol, we view QLACs not as “investments” but as “Tax-Deductible Longevity Insurance.” Unlike a standard SPIA which pays immediately, a QLAC sits dormant, growing tax-deferred, and then turns on a massive income stream exactly when your other assets might be running dry (e.g., age 85). Source: IRS Publication 590-B (Distributions from IRAs)
Scenario: 73-year-old with a $2M IRA. RMD Factor ~26.5.
- Without QLAC:
RMD Base: $2,000,000.
Mandatory Income: $75,471 (Taxable). - With QLAC ($200k Purchase):
RMD Base: $1,800,000.
Mandatory Income: $67,924.
Reduction: You suppress taxable income by ~$7,500/year. - BMT Analysis: As detailed in our RMD Death Spiral guide (#380), lowering your RMD is critical to avoiding IRMAA surcharges and higher tax brackets.
Longevity Payout Comparison
| Strategy | Annual Payout on 200k |
|---|---|
| Immediate Annuity (SPIA at 70) | 14000 |
| Deferred Annuity (QLAC at 85) | 52000 |
*Chart Note: Because the insurance company invests your money for 15 years and accounts for those who pass away, the payout at age 85 is massive (Mortality Credits). Values are approximate estimates.
CRITICAL SCENARIO: The “Alzheimer’s Hedge”
Protecting the “Old You” from the “Young You”.
| Risk Factor | Portfolio Only | QLAC Strategy |
|---|---|---|
| Cognitive Decline | High Risk (Bad trades/Scams) | Safe (Guaranteed Check) |
| Market Crash at Age 84 | Devastating | Irrelevant (Income starts at 85) |
Execution Protocol
As of 2024/2025, the lifetime QLAC limit is $200,000 (indexed for inflation). The old “25% of account balance” rule was repealed by SECURE 2.0. You can now max this out even if your IRA is smaller, provided you have the funds.
Fail Condition: Attempting to buy $300k will result in the excess being disqualified and taxable immediately.
Most clients fear dying at 84 and getting nothing. Add a “Return of Premium (Cash Refund)” rider. If you die before payments equal your $200k deposit, your heirs get the difference. It lowers the payout slightly but eliminates the “loss aversion” fear.
Treat the QLAC as part of your “Bond” allocation. If you buy $200k of QLAC, sell $200k of Bonds in your portfolio. Do not sell stocks to buy this.
Fail Condition: Buying a QLAC inside a Roth IRA. Never do this. QLACs are designed solely for Pre-Tax (Traditional) accounts to solve the RMD problem.
WEALTH STRATEGY DIRECTIVE
- Do This: Consider a QLAC if you have exceptional longevity in your family (parents lived to 90+) and you don’t need the RMD income for daily living expenses.
- Avoid This: Buying a Variable Annuity instead of a QLAC. Stick to the “Plain Vanilla” fixed income version. As noted in our SPIA Safety-First Strategy (#394), complexity in annuities usually benefits the salesman, not you.
Frequently Asked Questions
Can I start payments before 85?
Yes. Age 85 is the maximum deferral age. You can elect to start payments at 80 or 75, but the monthly amount will be lower. The magic of the tax deferral is maximized at 85.
Is it inflation-protected?
Generally, no. Most QLACs pay a fixed nominal amount. While you can buy a COLA (Cost of Living Adjustment) rider, it is expensive. It’s better to use your remaining stock portfolio to fight inflation.
What happens to the RMD reduction?
Your IRA custodian (e.g., Fidelity/Vanguard) will report the Year-End Balance excluding the QLAC value. This automatically lowers the RMD calculation on your tax forms.