Retirees and pre-retirees holding large IRAs can now shield up to $200,000 from required minimum distributions by purchasing a qualified longevity annuity contract, or QLAC. The dollar cap jumped from $125,000 after Congress passed SECURE 2.0, and the Treasury Department followed with final regulations that also eliminated an older rule capping premiums at 25 percent of the account balance. The result is a wider opening for IRA owners to defer taxes on a bigger slice of their savings while locking in guaranteed income that starts at a later age.
Why the $200,000 QLAC cap changes the RMD math
When the Treasury Department first created the QLAC framework in 2014, buyers faced a dual limit: premiums could not exceed 25 percent of the account balance or $125,000, whichever was less. As outlined in an earlier Treasury release, that percentage cap meant an IRA holder with $400,000 could commit only $100,000, even though the dollar ceiling was higher. For accounts under $500,000, the percentage restriction was usually the binding constraint.
SECURE 2.0 directed Treasury to raise the dollar limit to $200,000, indexed for inflation, and to scrap the percentage test entirely. Final regulations published in Internal Revenue Bulletin 2024-33 carried out both changes. The practical effect is straightforward: an IRA owner with $700,000 can now allocate $200,000 to a QLAC without bumping into any percentage ceiling. Under the old rules, the same person would have been limited to $125,000 by the dollar cap and $175,000 by the 25 percent test, so the binding limit was $125,000. The new structure increases that person’s maximum shelter by 60 percent.
That shift matters because of how required minimum distributions work. Each year after an account holder reaches the applicable RMD age, the IRS requires a taxable withdrawal based on the prior year-end balance divided by a life-expectancy factor from the Uniform Lifetime Table. The agency’s RMD FAQs explain that the balance used in this calculation generally includes all traditional IRA assets subject to the rules.
A QLAC changes that denominator. According to the IRS Form 1098-Q instructions, the premium value for a qualifying longevity annuity is excluded from the account balance used to determine RMDs until annuity payments begin. Removing $200,000 from that balance reduces the annual forced distribution and the income tax that comes with it, at least during the years before the QLAC starts paying out.
IRA owners with balances between roughly $600,000 and $1 million stand to benefit most from the removal of the percentage cap. Previously, the 25 percent rule kept their QLAC allocation well below the dollar ceiling. With only a flat $200,000 limit in place, that group can commit a larger share of savings to deferred income. Whether those owners actually increase QLAC purchases in the first full year after the cap change is an open question, because no official data on post-rule purchase volumes has been released.
How the regulatory record supports the shelter claim
The chain of authority for QLACs runs from statute to regulation to reporting form. SECURE 2.0 amended the Internal Revenue Code to authorize a higher premium limit and remove the percentage-of-account test. Treasury and the IRS then translated that directive into detailed regulations, including definitions of what counts as a qualifying contract, how to treat death benefits, and how to coordinate QLAC rules with other annuity provisions inside retirement plans.
Form 1098-Q sits at the end of that chain. Insurers issuing QLACs must report contract information, including the premium amount and the annuity starting date, to both the IRS and the contract owner. The instructions specify that properly reported QLAC premiums are excluded from the IRA balance for RMD purposes until payouts begin. That reporting mechanism is what allows custodians and taxpayers to justify a lower RMD calculation in the years after purchase.
The RMD exclusion does not erase taxes entirely; it defers them. Once annuity payments commence-often at age 80 or 85-the income is generally taxable as ordinary income, just like distributions from a traditional IRA. For some retirees, the trade-off is attractive: smaller RMDs and potentially lower marginal tax rates in their seventies, followed by predictable income later in life when portfolio withdrawals might otherwise be harder to sustain.
Planning considerations for IRA owners
The higher QLAC cap is not a blanket recommendation to shift $200,000 into an annuity. Locking in a large premium reduces liquidity and limits participation in market upside. Retirees who rely heavily on IRA assets for discretionary spending, gifting, or large one-time expenses may find the inflexibility too costly, even with the RMD benefit.
On the other hand, IRA owners with substantial balances, modest spending needs, and a desire for longevity protection may view the new limit as an opportunity. For them, using a QLAC to carve out a late-life income floor can complement Social Security and reduce the risk of outliving their portfolios. The expanded cap simply gives those households more room to execute that strategy while managing near-term RMD exposure.
As with most retirement decisions, the optimal QLAC allocation depends on age, health, risk tolerance, and tax position. The regulatory changes have tilted the math in favor of larger contracts for some investors, but the core question remains personal: how much guaranteed future income is worth giving up today’s flexibility and market participation.
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