A required minimum distribution (RMD) is the amount you must withdraw from your retirement account each year after reaching a certain age. The IRS requires this to ensure people don’t keep tax-deferred money hidden indefinitely. If you don’t take your RMD, the penalty is steep.
The basic rules have changed recently under SECURE Act 2.0. Most people now must start taking RMDs at age 73 (up from 72), and the penalty for missing an RMD dropped from 50% to 25% of the shortfall.
Understanding Annuities in Retirement Accounts
An annuity is a contract that pays you regular income—usually monthly or annually—for a set period or your entire life. You can buy an annuity inside an IRA or 401(k), or outside of a retirement account. The type of annuity matters greatly for RMD rules.
Qualified annuities live inside retirement accounts and use pre-tax money. Non-qualified annuities are purchased with after-tax dollars outside retirement accounts. The treatment under RMD law is completely different for each.
Can Annuity Payments Count Toward Your RMD?
Yes, but only under specific conditions. Payments from a qualified annuity inside your retirement account can satisfy your RMD—but the annuity must meet strict IRS requirements. A non-qualified annuity outside your retirement account cannot count toward RMD at all because it’s not part of your retirement plan balance.
For a qualified annuity to satisfy RMD, it must provide substantially equal periodic payments based on your life expectancy or a joint life expectancy. This means random or irregular payments don’t count. The payment amount must stay roughly the same each year (or increase by a set percentage).
How the IRS Values Your Annuity for RMD Purposes
The IRS requires you to value your annuity as of December 31 each year. This valuation determines how much you owe in RMD for that year. The valuation method depends on what type of annuity you own.
If your annuity guarantees a fixed payment—like $5,000 per year for life—the calculation uses your life expectancy at the time you bought it. If the annuity has variable payments tied to investment performance, the calculation is more complex. Whoever manages your annuity (usually an insurance company) should help provide the value for RMD calculations.
Real-World Examples: How Annuities and RMDs Work Together
Example 1: Qualified Fixed Annuity Inside an IRA
Sarah is 75 and owns an IRA worth $400,000. She used $100,000 of that to buy a fixed immediate annuity that pays her $800 per month ($9,600 per year). Her remaining IRA balance is $300,000. To calculate her RMD, the IRS adds the December 31 value of the IRA ($300,000) plus the value of the annuity contract.
Using her age and life expectancy, Sarah’s total RMD is $12,500. Her annuity payments of $9,600 count toward this. She only needs to withdraw $2,900 more from her regular IRA balance to meet the requirement.
Example 2: Non-Qualified Annuity Purchased Outside Retirement
Marcus is 74 with a 401(k) balance of $250,000. He also owns a non-qualified annuity he bought years ago that pays $500 per month. The non-qualified annuity is completely separate from his retirement plan, so those payments do not count toward his RMD.
His RMD is calculated only on the $250,000 in his 401(k), which equals approximately $9,200 for the year. He must withdraw this full amount from the 401(k) even though he’s receiving annuity income. The non-qualified annuity payments are just regular income.
Example 3: Deferred Annuity That Hasn’t Started Paying Yet
James is 73 and owns a deferred annuity inside his IRA that won’t start paying until age 80. The annuity is worth $50,000. He also has $200,000 in other IRA investments. His total IRA balance is $250,000.
For RMD purposes, the deferred annuity is included in his account balance even though it’s not paying him yet. His RMD is based on the full $250,000. Once the annuity starts paying at age 80, those payments will count toward future RMDs, but right now he must still withdraw based on his total account value.
Qualified Longevity Annuity Contracts: A Special Case
A qualified longevity annuity contract (QLAC) is a special type of annuity designed specifically to work well with RMD rules. You can put up to $145,000 (as of 2024) into a QLAC within your IRA or 401(k) without it counting toward your RMD.
This means you can exclude the QLAC from your account balance when calculating RMD, which lowers your required withdrawal. In exchange, you can’t touch the QLAC money until you reach age 85. QLAC payments that begin can then count toward your RMD once they start flowing.
When Annuity Payments Don’t Count Toward RMD
Annuity payments fail to count toward RMD in several situations. If the payment amount changes dramatically from year to year without a clear pattern, the IRS won’t accept it as satisfying the “substantially equal payments” requirement. Random lump sums from an annuity don’t work either.
Non-qualified annuities never count, no matter how regular the payments. Annuities that lack proper documentation also fail the test. If you can’t prove the annuity meets IRS standards, you can’t use it to satisfy RMD.
The Critical Role of the Still-Working Exception
The still-working exception allows some employees to delay RMD if they’re still working and don’t own 5% or more of the business. However, this exception does not apply to IRAs or to accounts at previous employers’ plans—only to the current employer’s plan.
If you own an annuity inside your current employer’s 401(k) and you’re still working, you might delay RMD on that account. But any annuity in an IRA requires RMD starting at age 73. The still-working exception can create confusion because it applies selectively.
Roth IRAs and Annuities: Different RMD Rules
Roth IRAs have special RMD treatment that affects annuities. During your lifetime, you never have to take RMDs from a Roth IRA, even if it holds an annuity. This is one major advantage of Roth accounts.
However, if you inherited a Roth IRA with an annuity, different rules apply to you as a beneficiary. The beneficiary rules changed significantly under SECURE Act 2.0, and most non-spouse beneficiaries must empty the account within 10 years. Annuity payments in an inherited Roth are still subject to these timelines.
Annuity Payment Amounts and RMD Sufficiency
For an annuity to fully satisfy your RMD, its annual payment must be at least as much as your calculated RMD for that year. If your RMD is $10,000 but your annuity only pays $8,000 annually, you’re $2,000 short and face penalties. You must make up the difference from other retirement account sources.
Many people use annuities to cover part of their RMD and withdraw additional amounts from other investments as needed. This hybrid approach gives you guaranteed income from the annuity while maintaining flexibility with other funds. It’s important to track both amounts carefully to avoid mistakes.
How to Calculate Your RMD with an Annuity
The calculation starts with your account balance on December 31 of the previous year, including the value of any annuities. You divide this by your life expectancy factor, which the IRS publishes in tables. IRS Publication 590-B contains all the tables you need.
For most people under age 79, you use the “Uniform Lifetime Table.” Married couples where the spouse is more than 10 years younger use the “Joint and Last Survivor Table.” Once you calculate your required amount, you subtract any annuity payments already received that year.
| Factor | Effect on RMD |
|---|---|
| Account value on 12/31 | Larger balance = larger RMD |
| Your age in calculation year | Older age = smaller divisor = larger RMD |
| Annuity payments received | Reduces remaining withdrawal needed |
Special Situations: Annuities Bought Before RMD Age
If you purchased an annuity years before you reached RMD age, the valuation can be tricky. The IRS has specific rules for annuities purchased before age 72 (now age 73). Generally, the annuity is valued using mortality tables and interest rates from the purchase date.
This “grandfathering” can actually help you because older mortality tables often produce higher valuations, which means lower RMD calculations. However, you must have proper documentation from the time of purchase. If records are missing, you may need to contact the annuity provider or the plan administrator for help reconstructing the valuation.
Penalty Consequences for Missing Annuity-Based RMDs
Under SECURE Act 2.0 changes, the penalty for missing an RMD dropped from 50% to 25% of the shortfall amount. If your RMD is $10,000 and you only withdraw $6,000 (leaving a $4,000 shortfall), the penalty is now $1,000 instead of $2,000.
An additional 10% penalty applies if you don’t correct the shortfall within two years. This makes it even more critical to track your RMD carefully when annuities are involved. The IRS may waive penalties if you can show reasonable cause and you quickly correct the error.
Comparing Annuity Types and Their RMD Impact
| Annuity Type | Counts Toward RMD? |
|---|---|
| Qualified fixed annuity in IRA | Yes, if substantially equal payments |
| Qualified variable annuity in 401(k) | Yes, if properly documented |
| Non-qualified annuity outside plan | No |
| QLAC (qualified longevity contract) | Not counted in account value; payments count once they begin |
| Deferred annuity not yet paying | Counted in account value, but no payments to offset yet |
Pros and Cons of Using Annuities to Satisfy RMD
| Pros | Cons |
|---|---|
| Guaranteed income stream reduces withdrawal uncertainty | Gives up control and flexibility of funds |
| Fixed payments simplify RMD tracking | Less liquid; money locked into contract |
| Can reduce required withdrawals from other investments | Fees and commissions can be high |
| Provides lifetime income option for longevity protection | Inflation can erode purchasing power of fixed payments |
| QLAC option allows tax deferral on larger amounts | Complex IRS rules require careful documentation |
Communication With Your Annuity Provider and Plan Administrator
Your annuity provider and retirement plan administrator must work together to ensure RMD accuracy. You should give your plan administrator a clear statement of your annuity value each December 31. Many providers now offer online portals where you can request RMD valuations and documentation.
Don’t assume automatic payment. Even if you receive a check monthly, you must verify it satisfies your RMD. Keep detailed records of all annuity payments received during the year, as you’ll need these for tax filing and IRS verification. Request written confirmation that your payments meet RMD requirements.
Changing Your Annuity Strategy After RMD Begins
Once you start taking RMDs, changing your annuity strategy requires careful planning. Cashing out an annuity early often triggers surrender charges and tax consequences. If you need additional income beyond what your annuity provides, it’s usually better to withdraw from other investments in your retirement account.
Conversely, if you want to shift money into an annuity after RMD has started, the timing affects your calculation. The new annuity’s value gets included in next December 31’s account balance for determining the following year’s RMD. Plan any changes before year-end to understand the full impact on your required withdrawals.
Spousal Considerations and Joint Annuities
Married couples may choose joint annuities that pay benefits to both spouses for both of their lives. The RMD calculation for a joint annuity uses joint life expectancy instead of individual life expectancy, which typically results in a lower required withdrawal. This can be advantageous if there’s a significant age difference between spouses.
Each spouse must track their own annuity income and RMD separately. If you own the annuity in your IRA but your spouse is the beneficiary, special rules apply. IRS guidance on spousal rollovers and annuities explains these scenarios in detail. Consult a tax professional if your situation is complex.
Estate Planning and Inherited Annuities
When you pass away, an annuity inside a retirement account becomes part of your estate and must be handled according to beneficiary rules. Non-spouse beneficiaries inherited after 2019 now have a 10-year deadline to empty inherited retirement accounts under SECURE Act rules.
An inherited annuity within that account must be managed to meet the 10-year requirement while still complying with RMD-like rules in years one through nine. Spouse beneficiaries have more flexibility and can treat the inherited annuity as their own. It’s crucial to name beneficiaries clearly and discuss these rules with your estate planner.
How Annuity Fees Affect Your RMD Calculation
Annuities often carry fees such as insurance charges, administrative costs, and surrender fees. These fees don’t reduce your account value for RMD calculation purposes—you still use the full contract value. However, fees do reduce the actual income you receive, which can affect whether annuity payments alone are sufficient to meet your RMD.
If your annuity’s high fees mean the payout is smaller than your RMD, you must supplement with other withdrawals. Over time, compare your annuity’s fees to other investment options. Some annuities offer lower-cost structures that may better serve your RMD strategy.
State Laws and Annuity Protections
State insurance laws provide some protection for annuity owners that don’t apply to other investments. Most states have guaranty funds that protect annuity payments if the insurance company fails. This protection typically covers up to $100,000 or more per claim.
This state-level safety net is one reason some people prefer annuities for retirement income. However, protection does not extend to investment performance or market-linked returns. The guaranty covers the insurance company’s promise to pay, not the growth of your investment.
Common Mistakes People Make With Annuities and RMD
Many people forget to count annuity payments toward their RMD and make unnecessary extra withdrawals. Others buy non-qualified annuities thinking they’ll help with RMD (they won’t). Some fail to document that their annuity meets “substantially equal payments” requirements, which can trigger IRS challenges.
One major error is cashing out an annuity early without understanding the tax and penalty consequences. Another is not updating plan administrators when you receive annuity payments, leading to double-counting and confusion. Always ask your provider: “Does this payment count toward my RMD?” and get the answer in writing.
Tax Treatment of Annuity Payments in RMD Years
Annuity payments from qualified plans are subject to ordinary income tax, just like regular RMD withdrawals. If the annuity is inside a traditional IRA or 401(k), you’ll owe federal income tax on the full amount unless part was purchased with after-tax contributions. Non-qualified annuities have a different tax structure where only the income portion is taxable.
You must include all annuity payments on your tax return for the year received. The plan administrator sends a Form 1099-R for the payment. Set aside funds to cover the tax bill on both the annuity payments and any additional RMD withdrawals you make from other sources.
Coordination With Social Security and Other Income
Taking annuity payments and RMD withdrawals affects your total income for the year, which may increase your Social Security taxation. If you’re in the gap years between retirement and Medicare, annuity income counts toward your modified adjusted gross income (MAGI), affecting various tax calculations.
Some people strategically time when they start their annuity to manage overall tax consequences. You might delay annuity payments a year or two if doing so lowers your tax bracket when combined with RMD and Social Security. A tax professional can model these scenarios for your specific situation.
Updated Rules Under SECURE Act 2.0 for Annuities
SECURE Act 2.0 made several changes relevant to annuities. RMD age increased to 73, which delays when you must start withdrawing. The QLAC limit increased to $145,000, allowing more money to be deferred into longevity contracts.
The act also expanded automatic annuitization rules for 401(k)s and IRAs, making it easier for plan administrators to offer annuities. For RMD purposes, these changes generally make annuities more attractive as a way to cover required withdrawals while maintaining retirement income security.
FAQs
Can I satisfy my entire RMD with annuity payments?
Yes, if the annuity is qualified (inside a retirement account) and provides substantially equal periodic payments of at least your calculated RMD amount.
Do non-qualified annuities count toward my RMD?
No. Non-qualified annuities purchased outside retirement accounts cannot satisfy RMD requirements under any circumstances.
What happens if my annuity payment is less than my RMD?
You must withdraw additional funds from your retirement account to make up the difference or face a penalty.
Can I use my annuity to satisfy RMD before the annuity payments start?
No. Only actual received payments count. Deferred annuities not yet paying are included in account value but provide no offset.
Does a QLAC count toward my account balance for RMD calculation?
No. QLACs are excluded from account value for RMD, making them especially valuable for reducing required withdrawals.
What if I don’t have documentation that my annuity meets IRS standards?
Contact your provider or plan administrator immediately. Without proper documentation, the IRS may not recognize the annuity as satisfying RMD.
Can I change my annuity after I’ve started taking RMDs?
Yes, but changes affect next year’s RMD calculation. Early surrender may trigger penalties and tax consequences worth reviewing first.
Do inherited annuities have special RMD rules?
Yes. Beneficiaries must follow SECURE Act 2.0 rules, which generally require account distribution within 10 years (with some annual withdrawal requirements in years one through nine).
How does my spouse’s age affect our annuity RMD calculation?
If your spouse is significantly younger and the annuity is joint, you use joint life expectancy, typically lowering your required annual withdrawal.
Will annuity fees reduce my RMD amount?
No. RMD is based on account value before fees, but fees reduce actual income available, so you may need additional withdrawals.
Related reading
- Are Annuities Really Taxable After 70? Avoid this Mistake + FAQs
- Do Deferred Annuities Have RMDs? (w/Examples) + FAQs
- How to Make a Retirement Annuity Actually Work (w/Examples) + FAQs
- Can I Withdraw From My Retirement Annuity? (w/Examples) + FAQs
- Do Defined Benefit Plans Have RMD? (w/Examples) + FAQs
- Are RMDs Required for Annuities? (w/Examples) + FAQs
- Can You Buy an Annuity With Cash? (w/Examples) + FAQs