Required Minimum Distributions and Annuities: What You Need to Know

The Tax Bill That Catches Retirees Off Guard

You've spent your career putting money into tax-deferred accounts. Every contribution reduced your taxable income. Every year of growth was untaxed. It felt like free money.

But here's the thing the IRS has been patiently waiting for: they want their cut. And starting at age 73 (or 75, depending on your birth year), they come to collect.

Required Minimum Distributions — RMDs — are the government's way of ensuring you eventually pay taxes on the money you deferred. Every year, you must withdraw a minimum amount from your traditional IRA, 401(k), 403(b), and similar accounts. Skip it, and the penalty is steep.

If you own an annuity inside one of these accounts, RMDs add a layer of complexity that trips up a lot of people. Let's untangle it.

How RMDs Work: The Basics

The concept is straightforward. Each year after you reach your RMD age, you must withdraw at least a minimum amount from your tax-deferred retirement accounts. The amount is calculated by dividing your account balance (as of December 31 of the prior year) by a life expectancy factor from the IRS Uniform Lifetime Table.

Here's a simplified example:

• Your traditional IRA balance on December 31: $500,000
• Your age on your birthday this year: 75
• Life expectancy factor from the IRS table: 24.6
• Your RMD: $500,000 / 24.6 = $20,325

You must withdraw at least $20,325 this year. You can always take more — but never less.

A few important details:

• The deadline for your annual RMD is December 31. However, for your first RMD, you can delay until April 1 of the following year. But be careful — delaying your first RMD means you'll take two RMDs in the same year (the delayed one plus the current year's), which could push you into a higher tax bracket.
• RMDs are taxed as ordinary income. They show up on your tax return just like a paycheck would. There's no capital gains rate, no special treatment.
• You can aggregate. If you have multiple IRAs, you calculate the RMD for each one separately but can take the total amount from any one (or combination) of your IRAs. This does NOT apply to 401(k)s — each 401(k) RMD must be taken from that specific plan.

How RMDs Work With Annuities

Here's where it gets interesting. An annuity inside your IRA is still subject to RMDs — but the mechanics depend on whether the annuity has been annuitized or not.

Non-Annuitized Annuities (Still in Accumulation)

If your annuity is in the accumulation phase — meaning you haven't started receiving annuity payments — it's treated just like any other IRA asset for RMD purposes.

The annuity's account value as of December 31 is included in your total IRA balance. Your RMD is calculated on that combined balance. You can satisfy the RMD by taking a withdrawal from the annuity itself, from another IRA, or from a combination.

The practical issue: Taking withdrawals from a deferred annuity during the surrender period may trigger surrender charges. Most annuities allow 10% penalty-free withdrawals per year, which may or may not cover your RMD obligation.

Annuitized Annuities (Receiving Payments)

If you've annuitized the contract — meaning you've converted the lump sum into a guaranteed stream of payments — the situation changes.

The IRS allows annuity payments to satisfy the RMD requirement for that contract, but only if the payments meet certain conditions:

• Payments must be made at least annually
• Payments must begin by your required beginning date
• Payments must be calculated in a way that doesn't extend beyond your life expectancy (or joint life expectancy with your beneficiary)
• Payments can be level, increasing, or a combination — but they can't decrease (except in specific circumstances)

If the annuity payments meet these requirements, you generally don't need to calculate a separate RMD for that contract. The payments themselves are the distribution.

But here's the nuance: If the annuity payments are less than what the RMD would have been (calculated on the contract's value), you may need to make up the difference from other IRA assets. And if you have other non-annuitized IRAs, the annuitized contract's value is typically excluded from those calculations — as long as it's a separately maintained contract.

The QLAC Exception: A Powerful RMD Planning Tool

Now for one of the most underused strategies in retirement income planning.

A Qualified Longevity Annuity Contract (QLAC) is a specific type of deferred income annuity that gets special treatment under RMD rules. Here's what makes it special:

You can exclude up to $200,000 of your qualified retirement savings from RMD calculations by putting it into a QLAC.

Let's see how that works:

• Without a QLAC: Your total IRA balance is $600,000. At age 75, your RMD is $600,000 / 24.6 = $24,390.
• With a $200,000 QLAC: Your RMD-eligible balance drops to $400,000. Your RMD is $400,000 / 24.6 = $16,260.

That's $8,130 less in required taxable income every year. Over 10 or 15 years, the tax savings add up fast — especially if those extra dollars would have pushed you into a higher bracket or triggered additional taxation of your Social Security benefits.

How QLACs Work

A QLAC is a deferred income annuity purchased inside your IRA. You fund it now, and it starts paying you guaranteed income at a future date — which can be as late as age 85.

The key features:

• Maximum premium: $200,000 (across all qualified accounts combined)
• Income start date: Must begin by age 85
• No cash surrender value — once you buy it, the money is committed (though death benefits are available for beneficiaries)
• Excluded from RMD calculations until payments begin
• Payments are taxable as ordinary income when they start (just like any other IRA distribution)

The QLAC serves a dual purpose: it reduces your RMDs during the years you may not need the extra income, and it provides a stream of guaranteed income starting later in retirement when you're most vulnerable to running out of money.

Strategies to Minimize RMD Tax Impact

RMDs are unavoidable (for traditional retirement accounts), but there are legitimate strategies to reduce their tax impact:

1. Roth Conversions Before RMD Age

This is the big one. Between retirement and age 73 (or 75), many retirees are in a lower tax bracket than they'll be once RMDs, Social Security, and other income stack up. This window is your opportunity.

By converting traditional IRA money to a Roth IRA during these lower-income years, you:

• Pay taxes now at a lower rate
• Reduce the traditional IRA balance that future RMDs are calculated on
• Move money into a Roth IRA, which has no RMDs during your lifetime
• Create a pool of tax-free income for later retirement

The strategy isn't free — you pay income tax on every dollar you convert. But paying 22% now to avoid 32% later is a trade worth making.

2. Qualified Charitable Distributions (QCDs)

If you're 70½ or older and you donate to charity, you can direct up to $105,000 per year (2024 limit, indexed for inflation) from your IRA directly to a qualified charity. This Qualified Charitable Distribution counts toward your RMD but is NOT included in your taxable income.

It's one of the cleanest tax strategies available. You fulfill your charitable giving, satisfy your RMD, and pay zero tax on that distribution.

3. QLAC Allocation

As we discussed above, sheltering up to $200,000 in a QLAC reduces your annual RMD calculation and defers the income to a later date when you might need it more (and might be in a lower bracket due to reduced spending).

4. Strategic Account Sequencing

Not all retirement accounts are created equal for RMD purposes:

• Traditional IRA/401(k): Subject to RMDs at 73/75
• Roth IRA: No RMDs during the owner's lifetime
• Health Savings Account (HSA): No RMDs (though beneficiary rules apply)

By drawing down traditional accounts earlier (through conversions or strategic withdrawals) and letting Roth accounts grow, you can reduce your eventual RMD burden.

5. Annuitize Strategically

If you annuitize a portion of your IRA, the annuity payments themselves can satisfy the RMD for that contract. By choosing an annuity with level or increasing payments that align with your RMD schedule, you create a seamless income stream that automatically checks the RMD box — no annual calculations, no missed deadlines, no paperwork headaches.

Common RMD Mistakes With Annuities

Mistake 1: Forgetting to include the annuity value in your RMD calculation. If your annuity is in the accumulation phase (not annuitized), its value must be included in your total IRA balance for RMD purposes. We've seen people calculate RMDs based only on their brokerage IRA and completely forget about the annuity sitting in another IRA. The IRS doesn't forget.

Mistake 2: Assuming annuity payments automatically satisfy the full RMD. They might — or they might not. If the annuity payment is less than the required distribution amount, you still need to take the difference from elsewhere. Verify the math every year.

Mistake 3: Taking the first RMD late without planning for the double-up. You can delay your first RMD until April 1 of the following year, but that means two RMDs in one calendar year. For many people, this creates a significant tax spike. Run the numbers before choosing to delay.

Mistake 4: Not coordinating across multiple accounts. If you have three IRAs and an annuity, you need to calculate the RMD for each account, then decide where to take the withdrawals from. The flexibility to aggregate across IRAs is helpful, but only if you use it intentionally.

Mistake 5: Ignoring the impact on Social Security taxation and Medicare premiums. RMD income counts toward the thresholds that determine how much of your Social Security is taxable and whether you owe IRMAA surcharges on Medicare premiums. A $30,000 RMD doesn't just cost you $30,000 in taxes — it can trigger a cascade of additional costs.

The Roth Advantage: No RMDs, Ever

We'd be remiss if we didn't mention this: Roth IRAs have no RMDs during the original owner's lifetime. If you convert some of your traditional IRA to a Roth — paying taxes now — those funds are permanently free from RMD requirements.

For retirees who don't need all their IRA money for living expenses, this is a game-changer. Instead of being forced to take taxable distributions, you can let Roth money grow tax-free and pass it to heirs with no income tax (though inherited Roth IRAs do have distribution rules under the SECURE Act).

This doesn't mean you should rush to convert everything. The conversion itself is a taxable event, and converting too much in one year can push you into a painfully high bracket. But a methodical, multi-year Roth conversion strategy — especially during the gap years between retirement and RMD age — is one of the most valuable tax planning moves available.

The Bottom Line

RMDs are a fact of life for anyone with traditional retirement accounts. They're not optional, and the penalties for getting them wrong are harsh.

But with the right planning — using QLACs to reduce the calculation base, Roth conversions to shift money out of the RMD universe, QCDs to direct distributions to charity tax-free, and annuities structured to automatically satisfy distribution requirements — you can turn RMDs from a tax headache into a manageable part of a well-designed retirement income plan.

The key is starting early. The best RMD strategies are implemented years before the first distribution is due. If you're approaching 65 and haven't thought about RMDs yet, now is the time.