QLAC: How to Legally Hide $200,000 from RMD Calculations
QLAC: How to Legally Hide $200,000 from RMD Calculations
๐ WHO THIS IS FOR
- Target Profile: Retirees with large Traditional IRAs ($1M+) who dread the tax hit from RMDs at age 73.
- Primary Objective: Tax Deferral & Longevity Protection (Pushing taxable income to age 85).
- Not Suitable For: Retirees with short life expectancy or those who need immediate income from their IRA.
EXECUTIVE SUMMARY
- The Problem: At age 73, the IRS forces you to withdraw money (RMDs) from your IRA whether you need it or not. This creates unnecessary taxable income.
- The Solution: A Qualified Longevity Annuity Contract (QLAC) allows you to take up to $200,000 from your IRA and defer the income start date until age 85.
- The Magic: The $200k moved to a QLAC is subtracted from your IRA balance for RMD calculations. You effectively erase that portion from the IRS’s radar for 12 years (from 73 to 85).
- Authority Baseline: Updated by the SECURE Act 2.0 (2022), the lifetime limit was raised to $200,000 (indexed for inflation) and the restrictive “25% of account balance” rule was repealed.
Most annuities are sold with expensive commissions and confusing riders. A QLAC is different. It is a pure “Longevity Hedge” sanctioned by the Treasury Department. By buying a QLAC, you are telling the IRS: “I will trade you a tax break today (lower RMDs) for a guaranteed income stream when I am 85.” According to Team BMT Analysis, this is the most efficient tool for “Tail Risk” hedging in a retirement portfolio. Source: Fidelity / Michael Kitces Research
Scenario: 73-Year-Old Male with $1M IRA. RMD Divisor is 26.5.
- Without QLAC:
RMD Calculation: $1,000,000 / 26.5 = $37,735.
Tax: You must withdraw and pay tax on $37k. - With $200k QLAC:
Adjusted IRA Balance: $800,000 ($1M – $200k).
RMD Calculation: $800,000 / 26.5 = $30,188.
Result: You reduced your mandatory taxable income by ~$7,500/year.
Bonus: At age 85, the QLAC kicks in, paying ~$25,000-$35,000/year guaranteed for life, exactly when other assets might be depleted.
BMT Verdict: Do not buy a QLAC for the ROI; buy it for the RMD reduction and the “Sleep at Night” factor. It allows you to spend the rest of your portfolio more aggressively from age 70-85, knowing that a fresh income stream turns on automatically at 85. It solves the “Fear of Running Out” problem.
Income Security at Age 90
| Strategy | Guaranteed Income at Age 90 |
|---|---|
| Traditional IRA (Bonds) | 15000 |
| QLAC Strategy | 42000 |
*Chart Note: Bonds carry “reinvestment risk” and principal depletion risk. A QLAC provides “Mortality Credits” (subsidies from those who died early), resulting in significantly higher cash flow in late life.
Legislative Win: Before 2023, you could only put the lesser of $145k or 25% of your IRA into a QLAC. This meant someone with a $400k IRA was capped at $100k. SECURE 2.0 repealed the 25% rule. Now, even someone with a $300k IRA can move $200k into a QLAC, dramatically reducing their RMD exposure.
โ BOUNDARY CLAUSE: This Structure Breaks Down If:
- Inflation Spikes: QLAC payments are usually fixed (nominal). If inflation averages 5% for the next 15 years, the purchasing power of the payout at age 85 will be halved. (You can buy COLA riders, but they are expensive).
- Early Death (Without Protection): If you die at 75, the insurance company keeps the moneyโUNLESS you bought the “Return of Premium” rider (Cash Refund). Always add the Cash Refund rider for peace of mind.
Execution Protocol
Not all annuities are QLACs. You must specifically request a “QLAC-compliant Deferred Income Annuity.” It must state in the contract that it is intended to be a QLAC under IRC rules.
This is non-negotiable for most families. Ensure the contract includes a “Cash Refund Death Benefit.” If you invest $200k and die before payments start, your heirs get the $200k back. This removes the fear of “losing the bet.”
After buying the QLAC, you must ensure your IRA custodian (e.g., Vanguard/Schwab) knows to exclude that balance from next year’s RMD calculation. They usually report the 1098-Q, but verify the Year-End Value reflects the reduction.
The QLAC is the only financial instrument that specifically targets the “Oldest Old” demographic risks while providing an immediate tax benefit today. It is a strategic carving out of the RMD mandate.
WEALTH STRATEGY DIRECTIVE
- Do This: Use a QLAC to “underwrite” your Long-Term Care plan. The extra income at age 85 can be used to pay for home health aides, effectively acting as a self-funded LTC policy.
- Avoid This: Buying a QLAC inside a Roth IRA. Roth IRAs already have no RMDs and are tax-free. Putting a QLAC in a Roth is a waste of the product’s primary tax benefit.
Frequently Asked Questions
Can I cash it out?
No. QLACs are generally irrevocable and illiquid. You are trading liquidity for longevity protection. Do not put money in a QLAC that you might need for emergencies.
Does it pay dividends?
Generally no. It is a fixed contract. However, some mutual insurers offer “participating” QLACs where dividends can increase the future income stream, helping with inflation.
What is the max age to buy?
Usually age 80-82 depending on the carrier, but payments must begin by the first day of the month following your 85th birthday. You cannot defer past 85.