The $210,000 the IRS Lets You Hide From Your Own RMD Calculation
Turn 73, and the IRS stops asking nicely. Required minimum distributions kick in on every dollar sitting in a traditional IRA, SEP-IRA, or old 401(k), whether you need the cash that year or not. For a business owner who spent decades funneling profit into a SEP-IRA or solo 401(k), that mandatory withdrawal can push you into a higher tax bracket, trigger Medicare premium surcharges, and force you to sell investments at the worst possible time.
There's a legal way to shrink that bill: a Qualifying Longevity Annuity Contract, or QLAC. Move up to $210,000 out of a qualified retirement account and into one of these contracts, and the IRS simply excludes that money from your RMD calculation — for years, sometimes over a decade. It's one of the few places in the tax code where "just don't count it" is the actual rule.
Here's how QLACs work, what changed under SECURE Act 2.0, and — just as important — when the math says to leave this strategy alone.
What a QLAC Actually Is
A QLAC is a deferred income annuity that can only be purchased with money from a qualified retirement account: a traditional IRA, SEP-IRA, SIMPLE IRA, 401(k), 403(b), or governmental 457(b). You hand an insurance company a lump sum today, and in exchange it promises to pay you a guaranteed stream of income starting at a future date you choose — anywhere from now until the month after your 85th birthday.
The mechanism that makes it useful for RMD planning is simple: while the money sits inside the QLAC waiting for payments to start, it isn't part of the account balance the IRS uses to calculate your required minimum distribution. A $1 million IRA with $210,000 committed to a QLAC only has to generate RMDs on the remaining $790,000. That's a real, immediate reduction in the amount you're forced to withdraw and pay tax on every year until the annuity starts paying out.
The 2026 Rules, Simplified by SECURE 2.0
Before SECURE 2.0, QLAC rules were a headache: you could contribute the lesser of $145,000 or 25% of your account balance, whichever number was smaller, recalculated across every retirement account you owned. Anyone with multiple accounts had to track the 25% ceiling across all of them.
SECURE 2.0 threw out the percentage test entirely. Now there's a single flat dollar limit, indexed for inflation in $10,000 increments:
- 2026 lifetime limit: $210,000 per individual (not per account, not per household — per person)
- The limit applies across all your qualified accounts combined
- If you funded a QLAC in an earlier year below the current cap, you can top it off up to the new limit
- Payments must begin no later than the first day of the month following your 85th birthday
A married couple can each fund a QLAC up to the individual limit from their own retirement accounts, effectively sheltering over $400,000 combined from RMD calculations.
Who This Actually Helps
QLACs aren't a universal retirement move — they're a targeted tool for a specific kind of retiree, and business owners often fit the profile better than most:
You've over-saved relative to spending need. If decades of maxing out a SEP-IRA or solo 401(k) left you with more retirement assets than you'll actually spend, RMDs create taxable income you don't need. A QLAC delays part of that forced income to an age when your other accounts may already be drawn down.
You're worried about outliving your money. A QLAC is fundamentally longevity insurance. You're pooling risk with an insurer's other policyholders — the ones who die early subsidize the guaranteed income for the ones who live long — so if your family has a track record of living well into their 90s, the mortality-credit math genuinely works in your favor.
IRMAA and Social Security taxation are on your radar. Lower RMDs mean lower reportable income, which can keep you under the Medicare Income-Related Monthly Adjustment Amount thresholds and reduce how much of your Social Security benefit gets taxed. For a business owner with a large SEP-IRA balance and a pension-like need for a income floor, that's often the real driver, not the annuity payout itself.
Where the Math Turns Against You
Financial planning researcher Michael Kitces has run the numbers on QLACs used purely as an RMD-avoidance tactic, and the results are a useful gut check before signing anything:
- A QLAC buyer typically has to survive to roughly age 88 just to recover the original premium in nominal payments.
- Compared to simply leaving the money invested and taking normal RMDs, a diversified portfolio growing at even a conservative rate tends to outperform the QLAC payout stream well past age 100.
- Because QLAC payments are backloaded to start at 80-85, the eventual payout is large enough to actually accelerate how fast the rest of your IRA depletes once RMDs resume on the reduced balance — the opposite of what many buyers assume they're getting.
Kitces's conclusion is a good filter: a QLAC is a reasonable trade if you're using it as a bond substitute for guaranteed income, hedging genuine longevity risk, or deliberately planning to spend down every asset you own. It's a poor trade if the only goal is "make my RMD number smaller." Run both scenarios — with and without the QLAC — through a retirement projection before committing.
A Worked Example
Say you're 68, recently sold your business's assets, and rolled the proceeds along with decades of SEP-IRA contributions into a $1.4 million traditional IRA. At 73, RMDs on the full balance would force you to withdraw roughly $52,800 in year one alone — taxable income you don't need, since a taxable brokerage account and Social Security already cover your spending.
You fund a QLAC with the maximum $210,000 and elect to start payments at age 82. Three things change:
- Your RMD-eligible balance drops to $1.19 million, cutting that first-year forced withdrawal to around $44,900 — real tax savings every year between 73 and 82.
- At 82, the QLAC begins paying a fixed monthly income for the rest of your life, regardless of how long you live or how markets perform in between.
- If you die before 82, your named beneficiary receives the $210,000 premium back (minus nothing, since no payments were made) — assuming you selected the return-of-premium option when you bought the contract.
The tradeoff: that $210,000 earns no market return and can't be touched for 14 years. Whether that's a good trade depends entirely on how much you value the guarantee versus the growth you're giving up — which is exactly why this decision belongs in a full retirement projection, not a back-of-envelope calculation.
The Fine Print That Trips People Up
It's illiquid and irrevocable. Once the free-look period ends, that premium is gone. You cannot cash out a QLAC to cover a roof repair, a medical bill, or a business emergency. Only fund a QLAC with money you're confident you won't need before the income starts.
Payments usually don't adjust for inflation. Most QLAC contracts pay a level dollar amount for life. A payment that looks generous at age 65 can lose 30-40% of its purchasing power by the time you're actually receiving it in your 80s. Some insurers offer a cost-of-living adjustment rider, but it lowers your starting payment in exchange.
Death benefits are limited unless you pay for them. If you die before income payments begin, the base contract typically pays your heirs nothing. A "return of premium" option — available on every QLAC by law — lets a beneficiary recover the purchase amount minus any payments already received, but it reduces your monthly income in exchange for that protection.
There's a dedicated tax form. Every QLAC issuer must file Form 1098-Q annually, reporting total premiums paid, the contract's fair market value, and projected future payments. You'll receive a copy each January until payments start or you turn 85 — keep every one of them with your retirement account records, since your accountant will need the cumulative premium figure to verify RMD calculations on your remaining accounts.
Shopping for a QLAC the Right Way
- Check the insurer's financial strength rating. You're relying on this company to make good on payments 15-20 years from now. Stick to insurers rated A or better by AM Best, S&P, or Moody's.
- Compare quotes across multiple carriers. Payout rates for identical contracts vary meaningfully between insurers — get at least three quotes before committing $200,000+.
- Decide your start age deliberately. Deferring from 75 to 85 substantially raises the monthly payout, but it also means a longer stretch with zero access to that principal. Match the start date to when you actually expect other income sources to thin out.
- Add the return-of-premium rider unless you're certain you don't need it. The income reduction is usually modest relative to the downside protection it buys.
- Run it by a fee-only advisor before funding. This isn't a decision to make from a cold call or a seminar pitch — the products are commissioned, and the incentives aren't always aligned with your interests.
Keeping the Bigger Picture in View
None of this works if you don't actually know your numbers. Deciding how much to commit to a QLAC — and confirming you're still under the $210,000 lifetime cap after prior contributions — requires clean, current records of every retirement account balance, contribution, and distribution you've made, not a rough guess pulled together at tax time. That's just as true of the SEP-IRA or solo 401(k) contributions a business owner makes throughout the year: sloppy bookkeeping today turns into a scramble later when you're trying to reconstruct exactly what you've put aside for retirement.
Beancount.io gives business owners plain-text accounting that's transparent, version-controlled, and easy to audit — so when it's time to make a five- or six-figure retirement decision, the numbers backing it up are already accurate. Get started for free and keep your books as disciplined as your retirement planning deserves to be.