Required minimum distributions (RMDs) can be a pain. If you need the income from them to cover retirement expenses, they’re great. But what if you don’t? You might have other sources of retirement income, but you still have to take these distributions, so all this extra money that you don’t need could just be sitting in your bank accounts. And since RMDs are taxed at your normal income rates, that money could actually be increasing what you owe in income taxes.

Luckily, you can purchase something called a Qualified Longevity Annuity Contract (QLAC). A QLAC potentially allows you to reduce your RMDs by 25%, keeping more of your retirement assets out of the government’s reach and in your accounts. They can also guarantee a steady stream of income later in life when you need it most. So, if this sounds good to you, here’s what you need to know:

What Is a QLAC?

For starters, a QLAC is an annuity contract. An annuity is a financial mechanism wherein you contribute funds or assets (like shares of stock or options) into an account, and then that account distributes money back in equal installments to you on a regular basis–either immediately or at some point in the future.

Qualified Longevity Annuity Contracts are longevity annuities owned inside a qualified retirement account (like a Traditional IRA, 401(k), 403(b), governmental 457(b), or other employer-sponsored, tax-deferred savings vehicle). This means that a portion of the assets in your accounts essentially gets removed and paid back to you in annuities later on. QLACs can help you reduce your RMDs (which could potentially reduce your income tax liability) and secure income for later in life. If you own a QLAC in your qualified retirement plan, the value of the QLAC is excluded from the RMD calculation up until the year of annuitization, which can be no later than age 85.

In general, the QLAC amount excluded from the annual RMD calculation is limited to the lesser of $135,000 or 25% of your retirement account balances. All other assets in the account will still be subject to the normal RMD rules.

Let’s take a look at what this means in actual numbers: Say you’re 70 years old and have a 401(k) account worth $500,000. You set up a QLAC that’s set to start paying out when you turn 85 with the value capped at $125,000 (25% of the 401(k) balance). Then, once you have to start taking RMDs at age 72, the QLAC value is excluded, so your RMDs would be calculated off the remaining $375,000 balance–not the full $500,000. This reduces what you're required to take out each year in RMDs. Then, once you turn 85, you start receiving annuities from that $125,000 that was previously removed from your account.

Key Considerations Before Purchasing a QLAC

In addition to premium limits mentioned above, there are some other things to consider when deciding if a QLAC is an appropriate solution for you:

• The limits apply separately to each spouse when each spouse has their own retirement account(s).
• A QLAC can provide for a single-sum death benefit paid to a beneficiary (in an amount equal to the excess of the premium payments paid). So, all isn’t lost in the event that you purchase a QLAC and pass away before using it.
• The final regulations allow for a return-of-premium feature that is payable before and after your annuity starting date, providing flexibility if you need to cancel or exchange the annuity. If the QLAC provides a life annuity to a surviving spouse, the return-of-premium feature can be preserved upon the death of both you and your surviving spouse.
• If premium payments exceed the premium limits, the annuity contract won’t fail to be a QLAC if the excess premium is returned to the individual’s account by the end of the year following the year when the excess premium was paid.

Where You Might Want Professional Guidance

The primary purpose of a QLAC is to provide a guaranteed lifetime income stream, especially if you’re worried that you’ll outlive your finances. While reducing your RMD by up to 25% sounds great, purchasing a QLAC solely to reduce your RMD is a tax-driven decision that may not be financially appropriate for you. However, for the right person, it could provide a guaranteed source of income at an advanced age that also helps reduce your tax liability when it’s time to start taking RMDs.

Before you rush out to buy a QLAC, keep in mind that the purchase still needs to be a reasonable economic solution for your situation. Deciding whether or not this opportunity applies (and is beneficial) to your specific circumstances can get complicated, so we recommend that you seek guidance from a retirement planning specialist or tax professional.

A version of this article originally appeared on August 13, 2014 on MarketWatch.com. You may view the article here.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.