Annuities and Required Minimum Distributions: The Basic Answer

Whether an annuity is subject to required minimum distributions (RMDs) depends on the type of account holding the annuity and when you bought it. If the annuity sits inside a traditional IRA, SEP-IRA, or 401(k), then yes — RMDs explore to the annuity's value starting at age 73 (as of 2023, though this age changes with law). If you own the annuity in a regular taxable account outside any retirement plan, RMDs do not explore at all.

The annuity itself is not what triggers RMDs. The retirement account type is. The IRS requires you to withdraw a minimum amount each year from most retirement accounts once you reach a certain age, and an annuity inside one of those accounts counts toward that total.

Key Takeaways

  • Annuities held in traditional IRAs, SEP-IRAs, straightforward IRAs, and 401(k) plans are subject to RMDs starting at age 73.
  • Annuities in Roth IRAs are not subject to RMDs during the account owner's lifetime, but beneficiaries must take RMDs after inheriting.
  • Annuities in regular taxable brokerage accounts have no RMD requirement, though you may owe income tax on gains when you withdraw.
  • If an annuity is already paying you income through an annuitization contract, those payments may count toward your RMD for that year.
  • The RMD amount is calculated based on your age and the total value of all your retirement accounts, not just the annuity.

How RMDs Work With Annuities in Retirement Accounts

When you turn 73, the IRS requires you to withdraw a percentage of your retirement account balance each year. This percentage is based on your age and life expectancy, found in IRS life expectancy tables. If you have an annuity inside a traditional IRA or 401(k), the annuity's current value counts toward your total retirement account balance for RMD purposes.

The RMD calculation uses the combined value of all your retirement accounts of the same type. If you have a traditional IRA with an annuity, a traditional IRA with mutual funds, and a SEP-IRA, you calculate the RMD using the total of all three accounts. You can then withdraw the RMD from whichever account you choose, though most people withdraw from the account with the most liquid investments.

If you miss taking your RMD, the IRS charges a penalty of 25 percent of the amount you should have withdrawn (reduced to 10 percent if you correct it within two years). This is one of the steepest penalties in tax law, so tracking your RMD is important.

Annuities Already Paying You Income

If your annuity has already been annuitized — meaning you converted it into a stream of regular payments — those payments may count toward your RMD. This depends on the type of annuity and when you started receiving payments.

For example, if you own a deferred annuity inside a traditional IRA and you have not yet started taking payments from it, the full value of the annuity counts toward your RMD calculation. But if you have already annuitized it and are receiving monthly or annual payments, those payments may satisfy part or all of your RMD for that year, depending on how much you are receiving and your account balance.

The rules here are complex and depend on IRS guidance specific to your annuity contract. If you have an annuity that is already paying you, contact your annuity provider to confirm how much of your RMD it covers.

Roth IRAs and Annuities: A Different Rule

Annuities held in a Roth IRA are not subject to RMDs while you are alive. You can leave the annuity untouched for your entire lifetime and never take a required withdrawal. This is one of the major tax advantages of a Roth IRA — the money can grow tax-free without the pressure of annual withdrawals.

However, if you inherit a Roth IRA containing an annuity, the rules change for you as the beneficiary. Most beneficiaries must now withdraw the entire inherited Roth IRA within ten years of the account owner's death (under rules that took effect in 2023). The annuity inside that inherited Roth counts toward that ten-year important date.

Annuities in Taxable Accounts Have No RMD

If you own an annuity in a regular brokerage account — not inside any retirement plan — there is no RMD requirement. You can hold the annuity as long as you want and never withdraw from it. This is true even after age 73.

The trade-off is that you do not get the tax deferral benefits of a retirement account. Any gains the annuity earns inside a taxable account are subject to income tax each year, even if you do not withdraw the money. When you do withdraw, you owe tax on the gains at your ordinary income tax rate.

What Happens If You Do Not Take Your RMD

If you have an annuity in a retirement account and you reach age 73 without taking your RMD, the IRS will charge you a penalty. As of 2024, the penalty is 25 percent of the shortfall — the difference between what you should have withdrawn and what you actually withdrew.

If you discover you missed an RMD in a prior year, you can correct it by withdrawing the missed amount plus the penalty. If you correct it within two years, the penalty drops to 10 percent. The IRS may waive the penalty if you have a reasonable cause, such as a serious illness or a mistake by your financial institution, but you must request the waiver in writing.

The best approach is to set a calendar reminder on December 31 each year to confirm you have taken your RMD. Most financial institutions will calculate it for you and send you a statement showing the amount due.

How to Calculate Your RMD With an Annuity

The IRS publishes life expectancy tables each year. To calculate your RMD, divide the total value of all your retirement accounts (including the annuity) as of December 31 of the prior year by the life expectancy factor for your age.

For example, if you are 75 and your total retirement account balance on December 31 of the prior year was $500,000, and the life expectancy factor for age 75 is 24.6, your RMD would be $500,000 divided by 24.6, or about $20,325. You must withdraw at least that amount by December 31 of the current year.

Most annuity providers and financial institutions calculate this for you automatically and send you a statement showing the RMD amount. You do not have to do the math yourself, but understanding how it works helps you catch errors.

Frequently Asked Questions

Do I have to take my RMD from the annuity itself?

No. If you have multiple retirement accounts, you can take your RMD from any of them. Many people withdraw from the most liquid account to avoid selling annuity contracts. However, some annuity contracts have restrictions on withdrawals, so check your contract before assuming you can withdraw the full RMD amount.

What if my annuity is not worth much anymore?

The RMD is still calculated based on the current value of the annuity, even if it has lost money. If your annuity is worth $50,000 and that is part of a $500,000 retirement account balance, the annuity's $50,000 still counts toward your total RMD calculation. You cannot skip the RMD because one investment performed poorly.

Can I delay my RMD if I am still working?

If you are still employed and do not own more than 5 percent of the company, you may be able to delay RMDs from your current employer's 401(k) until you retire. This is called the "still-working exception." However, this does not explore to IRAs or to 401(k)s from previous employers. Check with your plan administrator to see if your plan allows this.

What if I inherited an annuity in a retirement account?

Beneficiaries of retirement accounts have different RMD rules than the original account owner. In most cases, you must withdraw the entire inherited account within ten years. The annuity inside counts toward that important date. Some beneficiaries, such as surviving spouses, have different options — you may be able to treat the inherited IRA as your own or take distributions over your lifetime.

Does an when ready annuity change my RMD?

If you have converted a deferred annuity into an when ready annuity (one that pays you monthly or annually), the payments you receive may count toward your RMD. However, the rules depend on when you started the payments and the type of annuity. Contact your annuity provider to confirm how much of your RMD the annuity payments cover.