SPIA — Single Premium Immediate Annuity
Income begins within 30 days of deposit
DIA — Deferred Income Annuity
Income starts at a future date you choose
QLAC — Qualified Longevity Annuity Contract (the RMD reducer)
A QLAC is a special type of Deferred Income Annuity funded with IRA dollars. It is the only annuity structure that directly reduces your Required Minimum Distributions. Up to $200,000 of traditional IRA funds can be moved into a QLAC — those assets are excluded from RMD calculations until income begins, which can be deferred to as late as age 85.
The RMD math: Moving $200,000 into a QLAC removes it from your RMD calculation base. At a 4% distribution rate, that is $8,000 per year in reduced RMDs — potentially keeping you in a lower bracket, below an IRMAA threshold, or under the Social Security taxation threshold for multiple years.
When income begins: QLAC payments are taxed as ordinary income — same as standard IRA distributions. The strategy shifts the timing of that tax exposure to a later age when your other income sources may have declined.
| Factor | SPIA | DIA | QLAC |
|---|---|---|---|
| Income start | Within 30 days | Future date chosen at purchase | Deferred to chosen date, max age 85 |
| Funding source | After-tax or IRA funds | After-tax or IRA funds | IRA funds only |
| Funding limit | No limit | No limit | $200,000 (2024) |
| RMD impact | None — still subject to RMDs | None — still subject to RMDs | Removes from RMD base until income starts |
| Tax on payments | Exclusion ratio — partial tax-free | Exclusion ratio — partial tax-free | 100% ordinary income (IRA funds) |
| Reversible | No — irrevocable | Some flexibility before income starts | No — irrevocable |
| Primary use case | Immediate guaranteed income floor | Longevity insurance — future income | RMD reduction + longevity income |
| Death benefit | Optional rider | Optional rider | Return of premium options available |
Why only part of each SPIA/DIA payment is taxable
When you purchase a non-qualified annuity (funded with after-tax dollars) and receive income payments, the IRS recognizes that a portion of each payment is simply a return of your own original after-tax investment — not a gain. That portion is tax-free. Only the earnings portion is taxable.
The formula: Investment in contract ÷ Expected return = Exclusion ratio. For example, if you invested $200,000 in a SPIA with an expected return of $320,000 over your lifetime, the exclusion ratio is 62.5% — meaning 62.5% of each payment is tax-free return of principal, and 37.5% is taxable earnings.
When the exclusion ratio runs out: Once you have recovered your full original investment, all subsequent payments are 100% taxable as ordinary income.
Qualified annuity payments (IRA-funded) — different rule
If your SPIA, DIA, or QLAC is funded with pre-tax IRA or 401(k) dollars, there is no exclusion ratio. Every dollar of income received is 100% taxable as ordinary income — the same treatment as a standard IRA distribution. The exclusion ratio only applies to non-qualified (after-tax funded) annuities.
Annuity income + portfolio withdrawals = a stronger combined strategy
A guaranteed income floor from a SPIA or DIA reduces the pressure on your investment portfolio — you don't need to sell assets in down markets to cover fixed expenses because the annuity handles that. This allows the portfolio to remain invested longer, recover from market declines, and potentially leave a larger legacy. Income planning is not a choice between annuity income and portfolio withdrawals — it is a coordination of both to minimize lifetime taxes and maximize lifetime income.