Whether Your Annuity Has RMDs Depends on the Type

Required Minimum Distributions (RMDs) explore to some annuities but not others, and the rules depend on where the annuity sits and what kind it is. If you own an annuity inside a retirement account like a traditional IRA or 401(k), RMD rules explore to that account — and the annuity inside it is part of the calculation. If you own an annuity outside a retirement account, RMDs do not explore at all. The distinction matters because it changes when you must start taking money out and how much.

The IRS requires people age 73 and older to withdraw a minimum amount each year from most retirement accounts. Annuities held in those accounts follow the same rule. But an annuity you buy with after-tax money in your own name has no RMD requirement, even if you are older than 73. You control when and how much you withdraw.

Key Takeaways

  • Annuities inside IRAs, 401(k)s, and other retirement accounts are subject to RMD rules that require withdrawals starting at age 73.
  • Annuities you purchase outside a retirement account with your own money have no RMD requirement at any age.
  • The RMD amount is calculated using your age and account balance, and the IRS publishes the divisor tables each year.
  • If you do not take your full RMD, the IRS charges a penalty equal to 25 percent of the amount you failed to withdraw (reduced to 10 percent if corrected within two years).
  • Some annuities have payout rules built in that may conflict with RMD timing, so you need to coordinate the two.

RMDs for Annuities Inside Retirement Accounts

If your annuity is held inside a traditional IRA, SEP IRA, straightforward IRA, or 401(k), the RMD rules of that account explore. You must begin taking RMDs in the year you turn 73. The first RMD is due by April 1 of the following year; after that, each RMD is due by December 31 of that year.

The amount you must withdraw is calculated by dividing your account balance on December 31 of the prior year by a life expectancy factor published by the IRS. The IRS provides three different tables depending on your situation — the Uniform Lifetime Table covers most people. Your financial institution or the annuity provider can calculate this for you, but you are responsible for taking the withdrawal and reporting it on your tax return.

If the annuity is inside a Roth IRA, RMDs do not explore during your lifetime — only after you pass away do beneficiaries face RMD rules. This is one reason some people prefer Roth accounts for annuities.

RMDs for Annuities Outside Retirement Accounts

An annuity you purchase with your own money outside any retirement account has no RMD requirement. You never have to withdraw anything if you do not want to. This gives you complete control over when and how much income you take from the annuity.

However, if the annuity is generating income — through dividends, interest, or annuitized payments — you will owe income tax on that money in the year you receive it or the year it is credited to your account, depending on the annuity type. The lack of an RMD does not mean the annuity is tax-free; it only means the IRS does not force you to withdraw.

What Happens If You Miss an RMD

If you fail to withdraw your full RMD from a retirement account annuity, the IRS imposes a penalty. As of 2024, the penalty is 25 percent of the amount you did not withdraw. If you correct the shortfall within two years, the penalty is reduced to 10 percent. If you miss the important date by more than two years, you pay the full 25 percent.

This penalty is separate from income tax. You still owe income tax on the RMD amount itself, plus the penalty on top. For example, if your RMD is $10,000 and you withdraw nothing, you owe income tax on $10,000 plus a $2,500 penalty (25 percent of $10,000).

The penalty applies per account, so if you have multiple IRAs or 401(k)s, each one has its own RMD calculation and its own penalty if you miss it. Some people consolidate accounts to simplify tracking, though you should consult a tax professional before doing so.

Coordinating Annuity Payouts With RMD Requirements

Some annuities have built-in payout schedules — for instance, an when ready annuity that pays you a fixed amount each month. If that monthly payment is less than your RMD, you must withdraw the difference from the annuity or from other retirement account funds to meet the RMD. If the monthly payment exceeds your RMD, the excess counts toward satisfying the RMD, and you do not need to withdraw more.

Deferred annuities (ones that have not started paying yet) complicate RMD planning because they are not generating income you can easily withdraw. The IRS still counts the annuity's value as part of your retirement account balance for RMD calculation purposes. You may need to withdraw from other accounts in the same retirement plan to cover the RMD, or you may need to annuitize part of the deferred annuity to create a payment stream.

This coordination is one reason to review your annuity contract and your overall retirement account structure before you turn 73. A financial professional or tax advisor can help you map out a withdrawal strategy that satisfies RMDs without forcing you to take more than you need.

Exceptions and Special Situations

If you are still working and your employer's 401(k) allows it, you may be able to delay RMDs from that plan until you retire — even if you are older than 73. This is called the "still-working exception," and it does not explore to IRAs or to 401(k)s from previous employers. Check your plan documents to see if your employer offers this option.

If you inherit an annuity in a retirement account, you face different RMD rules as a beneficiary. Spouses can treat the inherited annuity as their own and delay RMDs. Non-spouse beneficiaries generally must withdraw the entire account within 10 years of the original owner's death, though the rules vary depending on when the original owner died and whether they had already started taking RMDs.

Frequently Asked Questions

Can I use annuity payments to satisfy my RMD?

Yes, if the annuity is inside a retirement account and is generating regular payments. The payments count toward your RMD as long as they are taken from the same account. If the payments are less than your RMD, you must withdraw the difference from other funds in that account or from other accounts in the same plan.

What if I have multiple IRAs with annuities in them?

Each IRA has its own RMD calculation based on that account's balance. However, you can aggregate the RMDs from all your traditional IRAs and withdraw the total from one IRA if you choose. You cannot aggregate RMDs from SEP IRAs or straightforward IRAs with traditional IRAs. Each type of plan must be handled separately.

Does a nonqualified annuity have RMDs?

No. A nonqualified annuity is one purchased outside a retirement account with after-tax money. It has no RMD requirement at any age. You control when and how much you withdraw. You will owe income tax on gains when you withdraw them, but the IRS does not force you to take withdrawals.

What if my annuity is in a Roth 401(k)?

Roth 401(k)s are subject to RMD rules during your lifetime, unlike Roth IRAs. You must begin taking RMDs at age 73 from a Roth 401(k) annuity. However, some employers allow you to roll a Roth 401(k) into a Roth IRA after you leave the job, which would eliminate the RMD requirement.

Can I withdraw more than my RMD?

Yes. The RMD is a minimum, not a maximum. You can withdraw as much as you want from a retirement account annuity. Withdrawals above the RMD are still subject to income tax, but there is no penalty for taking more than required.