Executive summary

In this 2026 update we revisit the Lopezes’ retirement plan and show how a $120,000 partial pension commutation, an $85,000 QLAC purchased inside an IRA, and $180,000 of staged Roth conversions produced a materially smoother taxable-income profile and lower required minimum distribution (RMD) exposure through the early 2030s. Updated market and policy context in 2024–2026 — higher interest rates, firmer annuity pricing and heightened attention to Medicare IRMAA and tax-year sensitivity — affect the same strategy’s risk/reward and implementation details today.

Background

María (66) and Carlos (68) are retired school administrators with combined 401(k) and traditional IRA balances near $1.1 million in 2024, and a defined-benefit pension that paid María $800/month. In late 2024 their district offered a one-time commutation: keep the lifetime pension, take the full lump sum, or elect a partial commutation. They chose a partial commutation that produced a $120,000 lump sum and left María a reduced monthly pension of $500.

Challenge

Their priorities were practical and common: 1) preserve steady lifetime income, 2) reduce taxable volatility from future RMDs, and 3) leave a modest legacy for two adult children. With Social Security timing, pension income, and large tax-deferred balances all interacting, the couple faced potential “RMD cliff” tax years in their mid-70s unless they reshaped account composition.

Solution

Their advisor proposed a three-part plan designed to reduce the IRA balance that counts toward RMDs and to create low-income windows for tax-efficient Roth conversions:

  • Roll the $120,000 into María’s traditional IRA and allocate funds to a QLAC (qualified longevity annuity contract) to remove a portion of the IRA from the RMD calculation.
  • Delay Social Security claims (Carlos to 69, María to 70) to raise lifetime guaranteed income and create low-income years for conversions.
  • Stage $180,000 in Roth conversions across three years while taxable income remained relatively low.

Why this still makes sense in 2026

Since the Lopezes executed the plan, several trends matter to anyone evaluating the same approach:

  • Higher interest-rate regime (2022–2025): the rise in Treasury and corporate yields improved payout factors for deferred fixed annuities and QLAC-like products, increasing the guaranteed late-life income purchased per premium dollar versus the 2010s low-rate environment.
  • Greater product variety: more insurers and broker/dealers now offer deferred income options with optional liquidity riders, return-of-premium or limited-period refunds — useful when partial commutations or portability concerns arise.
  • Tax and benefits sensitivity: Roth conversions are more commonly analyzed now with explicit modelling of Medicare IRMAA thresholds, Social Security taxation, and state tax impacts — three things that materially affect the net benefit of a conversion.

Implementation — timeline and steps

  1. Late 2024: Elect partial commutation; receive $120,000 lump sum.
  2. Q4 2024: Rollover the $120,000 into María’s traditional IRA to avoid immediate tax.
  3. Q1 2025: Use $85,000 of the IRA to buy a QLAC held inside the IRA; set deferred income to begin at age 85 to maximize cost-efficiency and reduce the IRA balance used for RMD calculations.
  4. 2025–2027: Delay Social Security (Carlos to 69, María to 70). Over three tax years (ages 67–69), execute staged Roth conversions totaling $180,000, sized to stay within preferred marginal tax brackets and to limit IRMAA exposure.
  5. Ongoing: Annual re-run of cash-flow and tax projections, incorporate updated annuity pricing and any IRS rule changes affecting QLAC limits or RMD starting ages.

Why specific choices were made

QLAC start age of 85: choosing a later start maximized the longevity-insurance effect per premium dollar and kept more of the IRA out of the RMD base during the 70s when RMDs would otherwise spike. Staggered Roth conversions: performed in low-income years while Social Security was deferred so conversions incurred lower marginal tax rates. Partial—and not full—commutation: preserved a lifetime pension floor to cover essential expenses.

Results (through October 2026, modeled and realized)

All outcomes below combine the Lopezes’ advisor’s pre-implementation model with actual cash-flow and tax returns through 2026. Numbers are rounded and presented as representative estimates.

  • QLAC and RMD base reduction: the $85,000 QLAC premium removed that amount from the IRA balance used to compute annual RMDs under the prevailing IRS rules at purchase time. In actuarial terms this reduced projected RMDs in their early 70s by roughly 7–9% relative to the baseline scenario where the pension remained intact and no QLAC was purchased.
  • Roth conversion impact: the $180,000 of staged conversions reduced future taxable IRA balances that would have produced RMDs. The advisor’s ten-year model estimated that, all else equal, the conversions reduced cumulative taxable RMDs by approximately $180,000 and — under the couple’s tax-bracket assumptions — lowered cumulative federal tax on RMDs by an amount equivalent to moving one marginal bracket over the modeled decade.
  • Social Security timing: delaying benefits raised the couple’s combined guaranteed Social Security income by roughly 25–30% per delayed claimant compared to earliest-claiming scenarios; that increase meaningfully offset withdrawals from taxable accounts in their late 70s and 80s in the plan’s projection.
  • Tax-year smoothing and Medicare IRMAA: by coordinating conversion amounts to stay under IRMAA trigger thresholds and by using the low-income windows while Social Security was deferred, the couple avoided higher Medicare premiums that would otherwise have offset some conversion benefits. That coordination required explicit projection and annual updates.
  • Realized cash flow through 2026: out-of-pocket taxes on the conversions were paid primarily from taxable savings (as planned), and the couple retained a $20,000 emergency cushion. Their taxable income volatility in 2025–2026 was reduced compared with the projected baseline where large RMDs would have hit earlier.

What worked — and new considerations to 2026

Success factors that remain relevant:

  • Partial commutation preserved the pension safety net while funding structural changes.
  • QLACs and deferred-income products remain useful ways to convert some tax-deferred assets into income that does not inflate RMD calculations (subject to IRS limits and product terms).
  • Delaying Social Security still creates low-income years that can meaningfully increase conversion efficiency.

New or emphasized considerations for 2026:

  • Annuity pricing matters: higher market yields in 2022–2025 improved payout factors, but insurers’ crediting and product terms vary. Always compare payout factors, fees, and optional riders across multiple carriers.
  • Medicare IRMAA and other benefit cliffs: Roth conversions that push modified adjusted gross income (MAGI) into higher bands can increase Medicare Part B/D premiums. These indirect costs can erode conversion benefits if not modelled in advance.
  • Policy and product change risk: QLAC rules, RMD ages and other retirement tax rules can change — so plan for policy uncertainty and re-run models when limits or laws are updated.

Lessons learned

  • Model the full set of interactions: RMDs, Social Security timing, Roth conversions, state taxes and Medicare IRMAA together — not in isolation.
  • Partial solutions preserve optionality. A partial commutation bought the Lopezes flexibility without eliminating lifetime pension protection.
  • Timing and size of Roth conversions should be driven by tax-bracket geometry and non-tax consequences (Medicare, Social Security taxation). Size conversions to avoid crossing high-cost thresholds.
  • Compare deferred-income products across carriers and prefer transparent payout-factor comparisons; ask for illustrations showing guaranteed income and non-guaranteed elements.
  • Revisit the plan annually. Small changes in investment returns, life expectancy assumptions or regulatory guidance can change the preferred path.

Takeaways

  1. Partial pension commutations can fund structural moves — not just immediate spending — and can pay for products that reduce future RMD exposure.
  2. Buying a deferred-income annuity or QLAC inside an IRA can reduce the IRA balance used for RMD calculations, but check current IRS limits, product terms and the annuity carrier’s financial strength.
  3. Coordinate Roth conversions with Social Security timing and Medicare IRMAA modelling — the interactions determine net benefit.
  4. Use multiple scenario models (market returns, longevity, tax changes) and update them annually; small parameter changes can change which strategy is optimal.
  5. Work with a licensed financial planner and tax advisor who will run both cash-flow and tax-year sensitivity analyses and can compare annuity offers across carriers.

FAQ

Are QLACs still excluded from RMD calculations in 2026?

QLAC premiums purchased inside an IRA are generally excluded from the IRA balance used to compute RMDs under the IRS framework that governs qualified longevity annuity contracts, subject to statutory dollar limits and product qualifications. Because limits and IRS guidance can change, confirm the current cap and guidance with your tax advisor or directly from IRS publications before purchase.

How much did higher interest rates affect annuity pricing?

After the low-rate period of the 2010s, interest-rate increases beginning in 2022 led to materially higher payout factors for many fixed and deferred-income annuities. That improved the cost-efficiency of buying late-life guaranteed income, but carrier pricing and solvency differ — always compare offers and check insurer ratings rather than relying on a single quote.

Can Roth conversions backfire because of Medicare IRMAA?

Yes. Roth conversions increase MAGI in the year of conversion, which can trigger higher Medicare Part B and D premiums (IRMAA) and affect Social Security taxation. Include projected Medicare premium changes in any conversion analysis and consider spreading conversions to stay below IRMAA thresholds when possible.

Is a partial pension commutation reversible?

Often not. Many public‑sector and private pension commutation elections are irrevocable. Before electing a lump sum or partial commutation, run lifetime cash-flow scenarios under multiple assumption sets and get clear written confirmation of irrevocability and plan rules.

Should everyone buy a QLAC to reduce RMDs?

No. QLACs make sense for retirees who have longevity risk concerns, want to reduce the IRA portion that counts toward RMDs, and accept illiquidity until the deferred start date. For others, Roth conversions, partial annuitization at different ages, or keeping liquidity for legacy purposes may be preferable. Evaluate alternatives using scenario modeling aligned with your goals.