Who Has to Take an Annuity RMD?

Annuities are appealing to many investors because they offer tax-deferred growth and the potential for guaranteed income that you cannot outlive. The tax-deferred growth is similar to the features of a 401(k) or a traditional IRA. While certain retirement accounts are subject to required minimum distributions (RMD), those same rules can apply to annuities as well. This specifically applies to annuities that are housed within an IRA, 401(k) or other retirement account. If you’ve got questions about annuities, RMDs or retirement planning in general, consult with a financial advisor.

Annuity RMDs: When Do They Apply?

Annuities held inside tax-advantaged retirement accounts—such as IRAs, 401(k)s, and similar plans—are subject to required minimum distributions (RMDs). These distributions represent the minimum amount you must withdraw each year starting at a certain age, as determined by federal law. The purpose of RMDs is to ensure that individuals do not indefinitely defer paying taxes on their retirement savings.

The age at which RMDs begin depends on your birth year:

If you turned 70 ½ before 2020, your RMDs began at age 70 ½
If you turned 70 ½ in 2020 or later and were born between 1951–1959, your RMDs began at age 73
If you were born in 1960 or later, RMDs start at age 75

You’re required to take your initial RMD no later than April 1 of the year after reaching your designated RMD age. For each subsequent year, the deadline to withdraw the minimum amount is December 31.

The RMD amount is calculated using the IRS Uniform Lifetime Table and is based on your age and account balance at year-end. The percentage you must withdraw increases over time—starting around 3.77% at age 73 and rising with age.

If you don’t take the required amount by the deadline, the IRS charges 25% penalty on the shortfall. This excise tax may be reduced to 10% if corrected within two years. Regular income taxes also apply to the amount withdrawn.

For non-qualified annuities, which are funded with after-tax dollars, the RMD rules do not apply. This means that individuals are not required to take distributions from non-qualified annuities at any specific age. However, withdrawals from non-qualified annuities may still be subject to income taxes on the earnings portion of the distribution.

Who Has to Take an Annuity RMD?

Because annuities offer so many benefits that are attractive to certain investors, sometimes they are held within a retirement account. These accounts are known as “qualified annuities” because they are held in a qualified retirement account. Qualified retirement accounts include 401(k)s, 403(b)s, 457s and similar accounts.

Qualified annuities must follow RMD rules just like any other tax-deferred retirement accounts. So if you used tax-deferred retirement funds to purchase a qualified annuity, you’ll be subject to RMDs once you reach RMD age (73 or 75).

Keep in mind that Roth IRAs do not require RMDs at all during the account holder’s lifetime. Roth 401(k)s, however, did require RMDs until 2023, but SECURE 2.0 eliminated RMDs for Roth 401(k)s starting in 2024.

Do Annuity Payments Satisfy RMDs?

The annuity payments you receive will count toward satisfying your RMD obligation for that specific account. However, if the annuity payment is less than the RMD amount, you must withdraw additional funds from the account to meet the requirement.

The SECURE 2.0 Act introduced several changes to retirement savings rules, including provisions related to RMDs and annuities. One notable change is the treatment of excess income from a qualified annuity. Under the new rules, if a retiree receives more income from a qualified annuity than the RMD for that specific contract, the excess amount can be applied toward satisfying RMD obligations from other retirement accounts, including IRAs.

Imagine a retiree who holds a qualified annuity, which is set to pay them $10,000 annually. This payment exceeds the RMD for that annuity, which is $7,000. Under the SECURE 2.0 Act, the excess $3,000 can be applied toward satisfying the RMDs of other accounts the retiree holds, such as a traditional IRA.

This provision of the SECURE 2.0 Act offers greater flexibility for retirees who hold multiple accounts, allowing them to better manage their distributions and potentially reduce the administrative burden of calculating separate RMDs for each account.

Bottom Line

Consumers who purchase an annuity within a qualified retirement account must take required minimum distributions (RMDs) from their annuity. The age at which RMDs begin depends on birth year, and failing to take the required amount results in a tax penalty. Annuity payments count toward satisfying RMD obligations, but if the payment is less than the required amount, additional withdrawals are necessary. Thanks to a provision of the SECURE 2.0 Act, excess income from a qualified annuity can satisfy RMDs of other tax-deferred retirement accounts.

Tips for Investing

An annuity can be an important part of your retirement income strategy. To determine how much income that you’ll need to meet your retirement goals, use our retirement calculator to determine how much you’ll need to save for retirement.
If you’re considering investing with an annuity, we recommend speaking with a financial advisor who can help you compare the pros and cons of each product. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.