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 be aware of 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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