Required Minimum Distributions Basics
A required minimum distribution is the amount the IRS requires you to withdraw each year from tax-deferred retirement accounts once you reach the applicable starting age. The rules are mechanical, but they interact with annuity contracts in ways that surprise people.
A required minimum distribution is the amount the IRS requires you to withdraw each year from tax-deferred retirement accounts once you reach the applicable starting age. Only annuities held inside qualified accounts are subject to RMDs.
Key takeaways
- The calculation divides the prior year-end balance by an IRS life expectancy factor.
- Starting ages and factor tables have changed by legislation; confirm against current guidance.
- Only qualified annuities are subject to RMDs; non-qualified contracts are not.
- A required distribution can exceed a rider guaranteed withdrawal and damage the benefit base.
- IRA distributions may generally be aggregated; employer plan accounts generally may not.
How is a required minimum distribution calculated?
The prior December 31 account balance is divided by a life expectancy factor published by the IRS. Starting ages and tables have been adjusted by legislation more than once, so both should be confirmed against current IRS guidance.
The calculation divides the account balance as of December 31 of the prior year by a life expectancy factor published by the IRS. The starting age has been adjusted by legislation more than once in recent years, so the current age and factor tables should be confirmed against current IRS guidance rather than assumed.
The first distribution year has a delayed deadline, but deferring it pushes two distributions into the same tax year. The consequences of that are worth modelling before choosing to defer.
How do annuities complicate RMDs?
Only qualified annuities are subject to RMDs. When a qualified contract carries a living benefit, the account value used for the calculation can differ sharply from the benefit base, and a required distribution can exceed the rider guaranteed amount.
Only qualified annuities - those held inside an IRA or another tax-qualified account - are subject to RMDs. Non-qualified annuities purchased with after-tax dollars are not.
When a qualified deferred annuity carries a living benefit rider, the account value used for the RMD calculation can differ substantially from the benefit base shown on the statement. And if the required distribution exceeds the rider guaranteed withdrawal amount, the excess can reduce the rider base - a genuine conflict between a tax rule and a contract provision.
Can you take your RMD from just one account?
IRA required distributions may generally be aggregated and taken from any one IRA, while employer plan accounts generally must be satisfied separately. Once a contract is annuitized, the payment stream typically satisfies the requirement for that contract.
RMDs from multiple IRAs may generally be aggregated and taken from any one of them, which offers some flexibility about which account to draw from. Employer plan accounts generally must satisfy their distributions separately. Once a contract has been annuitized, the payment stream itself typically satisfies the requirement for that contract.
How is an RMD calculated from an annuity?
For a deferred annuity in an IRA, the RMD is generally the prior December 31 value divided by the IRS life expectancy factor for your age. Some riders add an actuarial present value to that December 31 value.
The IRS Uniform Lifetime Table provides the divisor for most owners. The carrier usually reports the year-end value and may offer to calculate and pay the RMD automatically.
Once a qualified annuity is annuitized into lifetime income, the scheduled payments generally satisfy the RMD for that contract. Estimate yours with the RMD calculator.
Do RMDs trigger surrender charges?
Many carriers waive surrender charges on the RMD amount for that contract, even when it exceeds the standard free withdrawal percentage. This is a carrier practice, not a federal rule, so it should be confirmed in writing.
An RMD that exceeds a rider's permitted withdrawal can also affect the rider's benefit base. Most income riders treat RMDs from that contract as permitted, but the rider endorsement is the controlling document.
Two free tools can help: the surrender charge estimator and the RMD calculator. For a full picture of where a contract stands, the AnnuityScore assessment takes about two minutes.
Frequently asked questions
Do all annuities require minimum distributions?
No. Only annuities held inside tax-qualified accounts such as IRAs are subject to RMD rules. Non-qualified annuities funded with after-tax dollars are not.
Can an RMD reduce my income rider benefit?
It can. If the required distribution exceeds the rider guaranteed annual withdrawal amount, many contracts treat the excess as an excess withdrawal and reduce the benefit base. Some contracts include provisions that accommodate RMDs - the contract language governs.
Can I take my RMD from just one IRA?
IRA required distributions may generally be aggregated and satisfied from one or more IRAs. Employer plan accounts generally must be satisfied separately.
At what age do RMDs start for annuities in an IRA?
Under current law, RMDs generally start at age 73 for those born 1951 through 1959, and age 75 for those born in 1960 or later. Non-qualified annuities are not subject to lifetime RMDs.
Can I take the RMD for several IRAs from one annuity?
IRA RMDs can generally be aggregated and taken from any of the owner's IRAs, including an IRA annuity. Doing so may affect that annuity's free withdrawal or rider terms, so check the contract first.
What happens if I miss an RMD?
The IRS excise tax on a missed RMD is generally 25 percent of the shortfall, reduced to 10 percent if corrected promptly. Carriers that calculate and pay automatically help avoid this.