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.
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.