Are There Required Minimum Distributions for Annuities?

Are there Required Minimum Distributions for annuities? That is an excellent question. Hi there, I'm Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Today, we will talk about Required Minimum Distributions (RMDs) and annuities, including how they work and how they all tie together.

RMDs: What Are They?

Alright, we’re diving into RMDs. From here on, I’ll just call them RMDs because saying "Required Minimum Distributions" over and over can get a bit tedious. And as you know, I like to talk fast.

So, how do RMDs work with annuities? First, let's talk about annuities in general. I always hear people say, "I hate all annuities, Stan!" Well, guess what? You already own one. It’s called Social Security. And I love it when financial journalists or some advisors say, “Never put an annuity inside an IRA.” Stop right there—those people need to stop talking because that’s just bad advice. Can annuities be used inside of IRAs? Absolutely.

Why Use Annuities Inside an IRA?

Why would you buy an annuity and put it inside an IRA? That is a very good question. The simple answer is: You own an annuity for what it will do, not what it might do. The "will do" refers to the contractual guarantees of the policy. If you use IRA money to buy an annuity, you do it for those guarantees. No, there's no double tax deferral—an IRA already gives you tax deferral. So, you buy the annuity for the contractual guarantees it provides.

And don’t get me started on those people who say, "Never buy an annuity inside an IRA, Stan." Just stop. A Qualified Longevity Annuity Contract (QLAC), introduced by our friends at the IRS and the Department of the Treasury in 2014, was specifically designed for use inside an IRA. So, for those who are misinformed or just don’t know, I’ve written a book on QLACs. You can go to The Annuity Man and get it for free, with no obligation. QLACs are pension products designed to be used in your traditional IRA.

RMDs and Annuities: The Basics

Now, let’s get back to RMDs. What are they? RMDs are the IRS tapping you on the shoulder and saying, "Excuse me. Excuse me. It's time to start paying taxes on all that money you've been deferring all these years." At age 72 (it used to be 70 and a half, which never made sense to me), you have to start taking RMDs from your IRA assets. The IRS wants a percentage of your IRA assets every year, and they’ll force you to take that money out.

Now, the question is: “Do I have to take RMDs from my annuity?” Let’s say you have a Multi-Year Guarantee Annuity (MYGA) or an Indexed Annuity inside your IRA. These are CD-type, fixed products designed for principal protection. The answer is: No, you don’t have to take RMDs from those products. You can, but you don’t have to. The IRS only cares about the percentage of your IRA that needs to be withdrawn, not which asset it comes from. So, you can take your RMDs from another asset, like a mutual fund or an IRA bond.

RMDs with Immediate Annuities Inside an IRA

What about Single Premium Immediate Annuities (SPIAs) inside an IRA? A SPIA is designed to provide lifetime income. Let’s say you have a $500,000 IRA and buy a $200,000 SPIA. The income from that SPIA will satisfy your RMDs for that portion of the IRA. But the remaining $300,000 in the IRA will still need to have RMDs taken from it.

In other words, you’ll take RMDs from the non-annuity assets, but the income from the SPIA will count toward your RMD for that $200,000 portion of your IRA. You can’t use the excess income from the SPIA to offset RMDs on other assets in the IRA, though.

RMDs with QLACs

Let’s talk about QLACs for a minute. These are unique because they allow you to set up a future pension payout using IRA assets. If you buy a QLAC at age 70, for example, and decide to turn the income on at age 80, here’s how it works:

Currently, you can contribute up to $210,000 into a QLAC. This amount does not count toward your RMD calculation. When you begin the income stream from the QLAC at age 80, it will fully satisfy the RMD for that $210,000. The income from the QLAC takes care of the RMD for that asset—no extra RMD calculations are required.

Why QLACs Are Great

QLACs are one of the few emotional products in the annuity world because they are often purchased with the goal of providing lifetime income for a spouse. If the primary annuitant dies, the spouse continues to receive the income. It’s a legacy product for joint lifetime income.

For example, let’s say Johnny Trader has a huge IRA, and he sets up a QLAC for himself and his wife, Betty Trader. They set it up so that the income stream starts at age 80 or 85. When Johnny passes, Betty will continue receiving that income for the rest of her life. That’s a real legacy, and it provides peace of mind.

Are There Required Minimum Distributions for Annuities?

Yes, there are RMDs for annuities, but it depends on the type of annuity. If you have Deferred Annuities like a MYGA or an Indexed Annuity inside an IRA, they are included in the overall RMD calculation, but you don’t have to take RMDs from them specifically. You can take them from another asset if you choose. With SPIAs and QLACs, the income generated can count toward your RMD, but the rules vary.

Conclusion: Let’s Talk About Your RMDs

I encourage you to visit The Annuity Man and schedule a one-on-one conversation with us. We can discuss your RMD needs and how to incorporate annuities into your retirement plan, whether using a SPIA, MYGA, Indexed Annuity, or QLAC. I also encourage you to grab my books on annuities—go to my site and download my six Annuity Owner’s Manuals. You can download them for free with no obligation.

Thanks for joining me. I’ll see you in the next Stan The Annuity Man blog!