Annuities for Retirement Income: SPIAs, DIAs, and QLACs Explained

Income annuities do one thing no portfolio can: guarantee you won't outlive your money. A single-premium immediate annuity (SPIA), deferred income annuity (DIA), or qualified longevity annuity contract (QLAC) converts a lump sum into a predictable monthly paycheck — for life. Whether that belongs in your plan depends on your income gap, health, and how you think about risk. This guide walks through all three types with real numbers.

The income floor concept

Retirement income planning starts with a simple question: what's the lowest-spending year you could tolerate without feeling financially stressed? That floor — essential housing, food, healthcare, insurance — is what you want to guarantee, regardless of how markets behave.

Social Security already covers some of that floor. A pension, if you have one, covers more. But if the gap between those guaranteed sources and your essential spending is large, you're relying entirely on portfolio withdrawals to fill it. During a severe bear market early in retirement, that gap must be filled by selling depressed assets — exactly the scenario that creates sequence-of-returns risk.

An income annuity fills that gap with a third source of guaranteed income. It acts like a private pension you purchase: you hand an insurance company a lump sum, and in return they pay you a fixed monthly amount — for as long as you live, regardless of markets, interest rates, or anything else.

What this guide covers (and what it doesn't)

The word "annuity" is applied to several very different products. This guide covers income annuities only — contracts whose primary purpose is converting a lump sum to a lifetime income stream:

• SPIA — single-premium immediate annuity. Income starts within 12 months of purchase.
• DIA — deferred income annuity. Income starts at a future date you choose (e.g., age 75 or 80).
• QLAC — qualified longevity annuity contract. A DIA purchased inside an IRA with special RMD treatment.

This guide does not cover variable annuities (insurance wrappers around mutual funds), equity-indexed annuities (returns tied to a market index with complex caps and floors), or fixed deferred annuities (savings vehicles, not income vehicles). Those products serve different purposes and are evaluated differently — and many carry high commissions and surrender charges that make them poor fits for most retirees.

SPIA: the immediate income floor

How it works

You hand an insurance company a lump sum — say, $200,000. They immediately begin paying you a fixed monthly amount for the rest of your life. If you die early, payments typically stop (life-only option) or continue to a beneficiary for a period-certain period (e.g., 10 or 20 years). Period-certain guarantees reduce the monthly payout slightly but protect against dying in year two with nothing passed on.

What does a SPIA actually pay?

Payout rates depend on your age, sex, interest rates, and which insurer you use. In April 2026, with rates at their highest levels in over a decade, a $200,000 SPIA for a 65-year-old would pay approximately:¹

That's roughly a 7–7.8% annual payout rate on the premium — well above what a bond portfolio yields. The premium-to-payout ratio is favorable largely because of mortality credits: people who die early effectively subsidize those who live longest, letting the insurer pay a higher rate than pure interest would justify.

Tax treatment: qualified vs. non-qualified

Non-qualified SPIA (funded with after-tax money): Each payment is a partial return of your own principal (tax-free) and a partial payment of earnings (taxable). The IRS determines the split using the exclusion ratio under IRC § 72²:

Exclusion ratio = Premium ÷ Expected total payments
Tax-free amount = Monthly payment × Exclusion ratio

Worked example: A 65-year-old buys a $200,000 non-qualified SPIA. IRS life expectancy table gives a 20-year expected return period = 240 months of payments. The monthly payment is $1,250.

• Expected total payments: $1,250 × 240 = $300,000
• Exclusion ratio: $200,000 ÷ $300,000 = 66.7%
• Tax-free each month: $1,250 × 66.7% = $833
• Taxable each month: $417

Once you've received total payments equaling your original $200,000 premium (the "investment in the contract"), all subsequent payments become fully taxable ordinary income. If you live well past the expected return period, you've fully recovered your basis and the insurer's longevity subsidy is entirely taxable from that point forward.

Qualified SPIA (funded from a traditional IRA or 401(k)): The premium was never taxed, so there's no exclusion ratio. Every dollar of every payment is ordinary income. This is important for IRMAA planning — a large IRA-funded SPIA can push you into IRMAA tiers if the annual income is not carefully managed.

SPIA tradeoffs at a glance

DIA: deferred income annuity

How it works

A deferred income annuity works identically to a SPIA — except income starts at a future date you choose. Buy it at 65; income begins at 75. Buy it at 62; income begins at 70. The insurer holds the premium longer, so the payout rate is substantially higher than a SPIA purchased at the same age the income begins.

Example: A 65-year-old buys a $100,000 DIA with income starting at age 80. Because the insurer invests that money for 15 years and only pays survivors (those who die between 65 and 80 effectively subsidize those who reach 80), the monthly payment could be $1,500–$2,000+ — dramatically higher than the same $100K in a SPIA starting immediately.

When a DIA makes sense

DIAs work best as longevity insurance: you're not trying to generate income today, but eliminating the risk of portfolio depletion if you live to 85, 90, or 95. By locking in income starting at 80, you can build your withdrawal plan on a defined 15-year horizon (65–80) rather than an open-ended one that might last 30+ years. That dramatically reduces the assets you need to fund the 65–80 window — and makes aggressive drawdown of those assets mathematically safer.

QLAC: the IRA's income-deferral tool

How it works

A QLAC is a DIA purchased inside a traditional IRA, 403(b), or certain 401(k)s. It has one property that no other IRA investment has: assets held in a QLAC are excluded from your RMD calculation until the annuity begins paying out — at most by age 85.³

Under SECURE 2.0, you can contribute up to $210,000 per person to a QLAC in 2026 (indexed for inflation; the limit was $200,000 when SECURE 2.0 set it in 2023, and has been adjusted since).⁴ A married couple can shield up to $420,000 combined.

The RMD problem a QLAC solves

If you have a large IRA balance, RMDs can create a compounding problem: they generate taxable income that pushes you into higher brackets, triggers IRMAA surcharges, and causes more of your Social Security to become taxable. The cascade can add tens of thousands in avoidable tax over a decade. (See our RMD planning guide for the full cascade math.)

A QLAC removes up to $210,000 from the RMD base entirely, reducing RMDs from day one. When the QLAC eventually starts paying (say, at age 82), those payments are fully taxable ordinary income — but you've deferred that income to a period where your other income may be lower, and you've reduced RMDs for years prior.

QLAC vs. Roth conversion: which wins?

Both strategies reduce future RMDs. They're not mutually exclusive, but they work differently:

How to shop safely

Financial strength rating

Your annuity is only as reliable as the insurer behind it. Check AM Best ratings before purchasing — only buy from companies rated A- (Excellent) or better.⁵ A+ (Superior) rated carriers like New York Life, Northwestern Mutual, TIAA, and MassMutual have the strongest claims-paying capacity.

State guaranty association coverage

Every state has a guaranty association that provides a backstop if an insurer fails. Most states protect up to $250,000 per owner per insurer, per the NAIC model act — though some states offer higher coverage.⁶ Important caveats:

• Coverage is per-insurer, not per-contract. Three annuities with the same company = $250K total protection, not $750K.
• Coverage is determined by your state of residence, not where the policy was issued.
• If you're funding a SPIA with more than $250K, consider splitting between two highly-rated carriers from different insurer groups.

Rate shopping

SPIA and DIA payout rates vary meaningfully by carrier — sometimes by 10–15% on the same premium. Running quotes from 5–10 insurers through an independent broker (or a quoting tool) can increase your monthly income significantly with no additional risk if you stick to highly-rated carriers.

When annuities make sense for your retirement plan

Income annuities make the most sense when several of these apply:

• You have an income floor gap. Your essential spending (housing, food, healthcare) exceeds what Social Security + pension covers. An annuity fills the gap with guaranteed income instead of portfolio withdrawals.
• You have longevity concerns. Family history of living into the 90s means you're exposed to a 30+ year drawdown. Mortality credits become very valuable the longer you live.
• You have high risk aversion or behavioral concerns. If a 30% market drop would cause you to make poor portfolio decisions, a guaranteed floor removes that stress. The behavioral value is real — keeping your portfolio in equities for growth while your floor income is secured is worth more than the raw numbers suggest.
• You want to simplify. Managing a withdrawal plan, rebalancing, and monitoring sequence risk across a 30-year retirement is work. A SPIA eliminates a portion of that complexity permanently.

When they don't

• Poor or uncertain health. If your health suggests a shorter life expectancy, the mortality credits work against you. Annuities favor those who live long — and actuaries know this.
• You need liquidity. An annuity premium is gone. Medical emergencies, home repairs, helping family — once the check is written, there's no returning to it. Don't annuitize more than you can afford to lock up permanently.
• Your income floor is already covered. If Social Security + pension already covers all your essential spending, you don't need more guaranteed income. Adding an annuity to a fully-funded floor just trades flexible capital for redundant guarantees.
• Inflation is your primary concern. Standard SPIAs pay a fixed nominal amount. At 3% annual inflation, $1,200/month today is worth about $850/month in 10 years in real terms. A COLA rider (typically 2–3% per year) costs roughly 20–30% of your initial payout, which is often not worth it — especially since Social Security and TIPS already provide inflation protection in most portfolios.

How a fee-only advisor evaluates annuities

A fee-only retirement income specialist approaches annuities as a planning tool — neither advocating for them nor avoiding them. The evaluation involves:

• Calculating your income floor gap. Essential spending minus guaranteed sources. The annuity should close that specific gap, not be purchased generically.
• Sizing correctly. Annuitizing too much leaves insufficient liquid assets for healthcare emergencies, market opportunities, and estate goals. Too little and the annuity doesn't solve the sequence-risk problem it's meant to address.
• Integrating with the Roth conversion strategy. An IRA-funded SPIA creates a large ordinary income event. If you're in the Roth conversion window, coordinating conversion amounts with annuity income is essential to avoid bracket spikes and IRMAA triggers.
• Shopping objectively. No commission means no preferred carrier. A fee-only advisor will run quotes from multiple highly-rated insurers and choose the best combination of payout rate, financial strength, and contract terms.
• Modeling the alternatives. Before committing, a good advisor will model "annuitize $200K vs. keep it invested" across a range of mortality and return scenarios, showing you exactly what the breakeven looks like for your specific situation.

Sources

1. InsuranceGeek — SPIA Rates: April 2026 Monthly Payouts. Payout rate estimates for 65-year-old male/female purchasing a $100,000 single-premium immediate annuity in April 2026 (life-only). Rates shown in guide scaled to $200,000 premium.
2. IRS Publication 575 (2025) — Pension and Annuity Income. Explains the exclusion ratio calculation under IRC § 72 for non-qualified annuities funded with after-tax premiums, including how the investment in the contract is recovered tax-free over the expected return period.
3. IRS — Instructions for Form 1098-Q (2025). Governs qualified longevity annuity contracts: required reporting, RMD exclusion rules, latest-commencement date (first day of month after 85th birthday), and contribution limit rules under Treas. Reg. § 1.401(a)(9)-6.
4. OgletreeFinancial — What Is a QLAC? 2026 Rules, Limits & Benefits Explained. QLAC contribution limit for 2026 is $210,000 per individual, indexed from the SECURE 2.0 base of $200,000. Married couples can shelter up to $420,000 combined.
5. AM Best — Rating Methodology for Life/Annuity Insurers. A- (Excellent) is the minimum recommended financial strength rating for income annuity purchases, reflecting adequate balance sheet strength and operating performance to meet policyholder obligations over a long payout period.
6. NOLHGA — How Policyholders Are Protected. State life and health guaranty associations provide a safety net if an insurer becomes insolvent. The NAIC model act standard is $250,000 in present value of annuity benefits per owner per insurer; coverage limits vary by state.

QLAC limit of $210,000 per person verified for 2026 (inflation-indexed from SECURE 2.0 base). SPIA payout illustrations based on April 2026 market rates. State guaranty coverage varies — verify your state's specific limit before purchase.