Do you have an annuity? If so, are you aware of the required minimum distribution (RMD) rules? This guide will answer that question and provide more information on RMDs and annuities.
Annuity RMD Rules
There are fees called surrender charges for withdrawing from an annuity before the end of its surrender charge period.
The surrender charge period sometimes occurs at the same time as an annuity owner’s required minimum distribution period.
If the RMD amount is larger than the penalty-free withdrawal, most annuity companies will waive surrender charges.
If you’re not interested in taking your RMD due to a lack of necessity for the income, there’s good news. You can actually use your annuity and life insurance to create an estate plan that will be most beneficial for your beneficiaries.
The plan is to reinvest the RMDs while either:
- Utilizing an annuity that has improved death benefits, or
- Paying for life insurance premiums with RMDs
Although the rules may be complex, it is always a good idea to get help from a financial professional (like The Annuity Expert!). However, by using creative strategies to make the most of your RMDs, you and your heirs can benefit greatly.
RMD Rules for Deferred Annuities
Any deferred annuity that is held in an IRA or other type of tax-deferred account is subject to the same RMD requirements. IRA annuities are subject to required minimum distributions, but non-qualified annuities usually have no such obligation.
Using Annuities To Defer RMDs
A qualified longevity annuity contract (QLAC) could be a desirable option if you’re wanting to push back taking your RMDs. By having a QLAC, you can defer RMDs, reduce income taxes, and plan for costs associated with living a long life.
RMD Rules For Immediate Annuities
When you annuitize an immediate annuity, it means exchanging a lump sum for a guaranteed income stream. “Annuitization” is the process through which this transformation (which is considered final) occurs. Once you have annuitized your account, you cannot cash in the associated annuity. Also, when an annuity that exists within an IRA or 401k is annuitized, the value of the original investment does not affect future RMD calculations.
Immediate annuities are the only type of investment wherein the IRS considers annuitization as satisfaction for future RMDs.
Why are immediate annuities “exempt” from RMDs?
- Because an immediate annuity doesn’t have a cash value, you can’t use it to figure out your RMD. This is because you’re handing over money to an insurance company in return for guaranteed income later on.
- When you buy an immediate annuity, the original account holder transfers ownership of the annuity to the insurance company.
- The income from immediate annuities is usually “flat,” or unchanging, as the recipient gets older.
The existing RMD model did not accommodate the immediate annuity payments structure that the IRS proposed.
If you have an annuity, it’s important to know the required minimum distribution (RMD) rules. This guide provides information on RMDs and annuities, as well as how to calculate your RMD. If you have any further questions or would like a quote, please don’t hesitate to contact us.
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Frequently Asked Questions
Are annuities subject to rmd?
Yes, annuities are subject to Required Minimum Distributions (RMDs) starting at age 72 for most types of annuities, including traditional, variable, and deferred annuities, if they are held in an individual retirement account (IRA) or another qualified retirement plan. The amount of the RMD is based on your life expectancy and the value of your annuity on December 31st of the prior year.
Do you have to take an rmd from a non-qualified annuity?
No, non-qualified annuities are not subject to Required Minimum Distributions (RMDs). However, distributions from non-qualified annuities may be subject to income taxes.
How do rmds work with annuities?
With annuities, Required Minimum Distributions (RMDs) apply if they are held in an individual retirement account (IRA) or another qualified retirement plan. At age 72, you must start taking distributions from your annuity each year. The amount of the RMD is based on your life expectancy and the value of your annuity on December 31st of the prior year. The RMD must be taken by December 31st each year and is considered taxable income. Failing to take the RMD can result in penalties.
Do annuity payments count towards rmd?
Annuity payments from a qualified annuity that is held in an individual retirement account (IRA) or other qualified retirement plan do count towards the Required Minimum Distributions (RMDs) that you must take each year. The RMD amount is based on your life expectancy and the value of your annuity on December 31st of the prior year. The RMD must be taken by December 31st each year and is considered taxable income. You can choose to have the RMD taken in the form of annuity payments or as a lump sum, as long as the total RMD amount is taken.
Are annuities subject to required minimum distributions?
Yes, annuities held in individual retirement accounts (IRAs) or other qualified retirement plans are subject to Required Minimum Distributions (RMDs). This means that you must take a minimum amount of money out of your annuity each year, starting the year you reach age 72 (70 1/2 if you were born before July 1, 1949). The amount you must take out is based on your life expectancy and the value of your annuity on December 31st of the prior year.