Required minimum distributions (RMDs) are IRS-mandated withdrawals. Once retirees turn 73, they may need to take preset payments from certain tax-advantaged retirement accounts. RMDs aim to ensure that people eventually pay taxes on funds that have grown tax-deferred.

Whether annuities are subject to RMDs depends on the type of annuity and the account in which they’re held. Understanding how RMD and annuities interact — including the rules for qualified and non-qualified annuities — is key to avoiding costly penalties and planning retirement income effectively.

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What are RMDs (required minimum distributions)?

To understand how annuities fit into retirement planning, it helps to first answer a basic question: what are RMDs? RMDs are the minimum amounts you must withdraw annually from tax-deferred retirement plans like traditional IRAs and 401(k)s.

The IRS requires most people to start taking RMDs the year they turn 73. You must take your first RMD by April 1 of the year following the year you reach the applicable age. After that, RMDs are due annually by December 31. But if you’re still working beyond 73, some 401(k), profit-sharing, and 403(b) plans may allow you to delay withdrawals until retirement.

RMDs prevent tax-deferred retirement savings from being untouched indefinitely. They ensure that account holders eventually pay income taxes on the funds that received favorable tax treatment during accumulation.

How are RMDs calculated?

The IRS calculates RMDs by dividing your retirement account balance by your life expectancy factor, as defined by IRS life expectancy tables. The most common is the Uniform Lifetime Table, though there are alternatives for beneficiaries and certain account owners with younger spouses.

Failing to take your RMD on time can trigger a 25% excise tax on the amount you should have withdrawn. If corrected within two years, the IRS may reduce your penalty to 10%.

Are annuities subject to RMDs?

Variable, indexed, and fixed annuities may be subject to RMDs depending on whether you use pre- or after-tax dollars to fund the account. Let’s explore annuity RMD rules.

Qualified annuities

Qualified annuities are typically subject to annuity RMD rules because they are funded with pre-tax dollars and held within retirement accounts such as traditional IRAs, 401(k)s, or 403(b)s. Because these plans are tax-deferred retirement vehicles, the IRS generally requires withdrawals starting at age 73. Here’s how required minimum distributions are typically calculated:

• If the annuity hasn’t been annuitized (converted to regular income payments), the RMD is typically calculated based on the account value using the IRS life expectancy tables.
• If the annuity has been annuitized, the payments may automatically count towards the RMD requirement, provided the payment schedule meets IRS guidelines. If payments are less than the calculated RMD then you’ll need to withdrawal the difference from other qualified accounts. 

Non-qualified annuities

Non-qualified annuities are funded with after-tax dollars, so non qualified annuity RMD rules do not apply. Unlike qualified retirement accounts, the IRS does not require minimum distributions at age 73.

Because contributions are made with after-tax money, the IRS has already taxed the principal. Earnings within the contract grow tax-deferred, and taxes are only due on the earnings portion when withdrawals are taken. As a result, there’s no requirement to withdraw funds from a non-qualified annuity as you age.

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Are fixed annuities subject to RMD?

Whether fixed annuities are subject to RMD depends on how the annuity is funded and where it’s held. In general, fixed annuities themselves are not automatically subject to required minimum distributions. Instead, RMD rules apply when the annuity is held inside a tax-advantaged retirement account, such as a traditional IRA or 401(k).

If a fixed annuity is purchased with retirement funds inside a qualified account, the contract typically follows the same annuity RMD rules that apply to the underlying account. Once the account holder reaches the RMD age (currently 73), distributions must begin.

However, if the fixed annuity is purchased with after-tax dollars outside a retirement account, RMD requirements generally do not apply.

Annuity RMD Rules

Understanding annuity RMD rules is important for managing retirement income and avoiding IRS penalties. In most cases, the rules depend on whether the annuity is considered qualified or non-qualified.

For qualified annuities, which are funded with pre-tax dollars inside retirement accounts like IRAs or 401(k)s, the IRS requires withdrawals beginning at age 73. These required minimum distributions are calculated using IRS life expectancy tables and the value of the retirement account.

For non-qualified annuities, which are funded with after-tax dollars, the IRS generally does not require RMDs. This means funds can continue growing tax-deferred until the owner chooses to begin withdrawals.

Understanding how RMD and annuities interact can help retirees plan distributions more efficiently and avoid unnecessary tax penalties.

Do annuity payments count toward RMDs?

In some cases, annuity payments may even help avoid RMD with annuity income, since payments can satisfy part or all of the required distribution for that account.

Converting your qualified annuity into a stream of regular income payments typically counts toward the RMD for that contract. The SECURE 2.0 Act also introduced a little-known change that allows excess annuity payments to cover RMDs for other qualified accounts.

For example, say you use your 401(k) funds to invest in a qualified annuity. When you turn 73, you may need to take RMDs for both the annuity and the 401(k) as a whole to meet the required distribution rules. In this scenario, you annuitize the contract and begin receiving $1,000 per month from the qualified account. If the annuity’s RMD is only $500, the remaining $500 can count toward the 401(k)’s RMD requirement.

This can be a significant advantage because it allows more funds to remain invested within your 401(k) while still satisfying the required distributions.

However, keep these key points in mind:

Account type: Extra annuity payments only count toward the qualified retirement account they are held in.
Payment amount: If the annuity payout is too small, it may not fully satisfy the required distribution for the year. You'll need to ensure your total withdrawals meet the overall RMD requirement, even if one annuity covers only part of it.

Bottom line: If you're receiving regular income from a qualified annuity, those payments may fully or partially satisfy your RMD if they meet IRS rules. Confirming with a tax professional or financial advisor can help ensure you're withdrawing enough to avoid penalties.

How to calculate your annuity RMD

Calculating an annuity RMD involves a few simple steps:

• Determine your annuity’s year-end account value: Look up the contract value of your annuity as of December 31 of the previous year. This number is the basis for calculating RMD.
• Find your IRS life expectancy factor: Check the IRS’s Uniform Lifetime Table (or Joint Life Table if applicable). Find the factor corresponding to your age on your birthday during the current calendar year.
• Use the following formula: Contract Value ÷ Life Expectancy Factor = RMD.

Say you’re 80, your contract is worth $500,000, and your IRS life expectancy factor is 20.2. Your RMD would be: 

$500,000 ÷ 20.2 = $24,752

Understanding annuity types as part of your retirement plan

Knowing RMD rules is an essential part of retirement income planning, especially when annuities are part of your portfolio. At Gainbridge, we offer flexible annuity plans with no hidden fees or commissions so you can plan for retirement confidently. 

Whether you're exploring annuities for guaranteed income in retirement or planning how to take care of your family after you're gone, Gainbridge has a solution for you. 

SteadyPace from Gainbridge offers predictable growth and guaranteed returns, helping you move confidently toward your long-term goals.

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‍This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.