RMD (Required Minimum Distribution)
The minimum annual amount the IRS requires you to withdraw from qualified accounts beginning at the applicable age.
A required minimum distribution is the minimum amount the IRS requires an owner to withdraw each year from a qualified retirement account, including a qualified annuity held inside an IRA or employer plan. Under current law the first distribution year is age 73, rising to 75 for owners born in 1960 or later. Non-qualified annuities bought with after-tax money are not subject to RMDs during the owner's lifetime.
- —RMDs apply to qualified annuities - those inside an IRA or employer plan - not to non-qualified contracts during the owner's life.
- —The current starting age is 73, moving to 75 for owners born in 1960 or later.
- —The amount is the prior year-end account value divided by an IRS life expectancy factor.
- —A free-withdrawal allowance and the RMD amount are two separate limits and do not always line up.
The amount is the prior year-end balance divided by a life expectancy factor published by the IRS. The starting age has been changed by legislation more than once, so current guidance should be confirmed rather than assumed.
In a qualified annuity with an income rider, a required distribution larger than the rider guaranteed withdrawal can be treated as an excess withdrawal and reduce the benefit base.
Which annuities are subject to an RMD
The tax wrapper determines the answer, not the product. An annuity purchased inside an IRA, a 401(k), a 403(b), or a similar qualified plan is subject to the same distribution rules as any other asset in that account. An annuity purchased with after-tax dollars outside a retirement account is non-qualified and has no lifetime RMD, though distributions to a beneficiary after death follow their own rules.
| Contract | Lifetime RMD | Notes |
|---|---|---|
| Qualified annuity in an IRA | Yes | Included in the IRA aggregate calculation |
| Annuity inside an employer plan | Yes | Generally calculated per plan |
| Non-qualified annuity | No | After-tax purchase; post-death rules still apply |
| Roth IRA annuity | No | No lifetime RMD for the original owner |
| QLAC within limits | Deferred | Designed to defer income to a later age under IRS limits |
How the amount is calculated
The basic calculation divides the prior December 31 account value by a life expectancy factor from the IRS Uniform Lifetime Table. Annuitized contracts and contracts with certain living benefit riders can involve additional valuation rules, because the actuarial present value of some benefits must be added to the account value for this purpose.
That last point catches people. A contract with a rich income rider can produce a larger required distribution than the plain account value suggests, and the carrier is the party that reports the figure.
Where RMDs collide with surrender charges
Most deferred annuities allow a free withdrawal each contract year, commonly around 10 percent of value. Many carriers also waive surrender charges on amounts withdrawn specifically to satisfy an RMD attributable to that contract. Those two allowances are not identical, and the terms are contract-specific.
- —Whether the contract includes an RMD-friendly surrender charge waiver
- —Whether the waiver covers only the RMD attributable to that contract
- —How the withdrawal interacts with the free-withdrawal allowance for the same year
- —Whether a market value adjustment still applies to the amount withdrawn
Frequently asked questions
- At what age do annuity RMDs start?
- Age 73 under current law, rising to 75 for owners born in 1960 or later. The first distribution may be deferred to April 1 of the following year, though doing so places two distributions in one tax year.
- Do non-qualified annuities have RMDs?
- Not during the owner's lifetime. A non-qualified annuity is purchased with after-tax dollars and is not subject to lifetime required minimum distributions. Distributions after the owner's death follow separate rules.
- Can I take my RMD from an annuity without a surrender charge?
- Often, but it depends on the contract. Many carriers waive surrender charges on the RMD attributable to that specific contract; others only allow the standard free-withdrawal amount. The contract and the carrier confirm which applies.
- What happens if I miss an RMD?
- A federal excise tax applies to the shortfall, reduced if the shortfall is corrected promptly within the window allowed. A tax adviser should handle any missed distribution.
- Does an annuitized contract still have an RMD?
- Once a qualified contract is annuitized into a stream of periodic payments meeting the requirements, those payments are generally treated as satisfying the RMD for that contract.