Imagine reaching age 73 and having the flexibility to keep your money growing tax-deferred, instead of the IRS forcing you to withdraw it. That’s the powerful and often misunderstood advantage of a non-qualified annuity.
Which is why people keep asking; are non-qualified annuities subject to required minimum distributions?
As a financial planner for nearly three decades, I’ve seen the confusion this topic creates. While most retirement accounts force you to take Required Minimum Distributions (RMDs), non-qualified annuities do not have RMDs during the owner’s lifetime.
Understanding this simple rule is the key to unlocking advanced retirement income and legacy planning strategies. This guide is the playbook I used with my clients to do just that.
📌 Key Takeaways on Non-Qualified Annuity RMDs
- No RMDs for the Owner: Unlike IRAs and 401(k)s, you are never required to take distributions from a non-qualified annuity during your lifetime.
- It’s All About the Taxes: Non-qualified annuities are funded with after-tax money, so the IRS isn’t waiting to tax your principal. This is the simple reason they are exempt from RMDs.
- Flexibility is the Superpower: The lack of RMDs gives you incredible control over your annual taxable income, helping you manage tax brackets and avoid Medicare IRMAA surcharges.
Key Takeaways Ahead
The Simple Reason: After-Tax vs. Pre-Tax Money
The confusion around annuity RMDs disappears when you understand one core principle: how the account was funded.
Qualified Accounts (IRAs, 401(k)s):Â
These are funded with pre-tax dollars. You get a tax deduction on the way in, and the money grows tax-deferred. The IRS mandates RMDs starting at age 73 (or 75 for those born in 1960 or later, per the SECURE 2.0 Act) to ensure they finally collect the taxes you’ve been deferring.
Non-Qualified Annuities:Â
These are funded with after-tax dollars. You’ve already paid taxes on the principal. The money grows tax-deferred, and when you withdraw it, you only owe taxes on the earnings. Since the IRS isn’t waiting to tax your principal, there’s no reason to force a withdrawal.
Qualified vs. Non-Qualified Accounts: A Clear Comparison
This table breaks down the essential differences that every retiree needs to understand.
| Feature | Qualified Accounts (IRAs, 401ks) | Non-Qualified Annuities |
|---|---|---|
| Funding Source | Primarily Pre-Tax Dollars | After-Tax Dollars |
| RMDs for Owner? | Yes, starting at age 73/75 | No, never during your lifetime |
| Taxation on Withdrawal | Entire withdrawal is taxed as ordinary income | Only the earnings portion is taxed as ordinary income |
| Best For… | Primary retirement savings and getting upfront tax deductions. | Supplemental retirement savings with maximum withdrawal flexibility. |
Michael Ryan Money’s Playbook: 3 Ways to Use This RMD Exemption to Your Advantage
The freedom from RMDs isn’t just a technicality; it’s a strategic opportunity. Here are the three most powerful ways I helped my clients leverage this benefit.
1. Create a “Tax-Control” Account
This was the most effective strategy for my client, “Sarah.” At age 73, she had a $400,000 non-qualified annuity and a $200,000 Traditional IRA. Instead of taking proportional withdrawals, she took only the required RMD from her IRA and supplemented the rest of her income needs from a taxable brokerage account. She left the non-qualified annuity untouched, allowing it to continue growing tax-deferred.
- Result:Â
By keeping her taxable income below the $94,300 threshold for the 22% bracket, Sarah saved approximately $3,800 in federal taxes that year alone.
2. Defuse the “Medicare IRMAA Bomb”
Your Medicare Part B and Part D premiums are based on your income. A large RMD can push you into a higher bracket, triggering the Income-Related Monthly Adjustment Amount (IRMAA). Because you can choose not to take withdrawals from your non-qualified annuity, you can keep your income just below the IRMAA cliffs, potentially saving thousands per year in premiums.
3. Build a More Efficient Legacy
A non-qualified annuity can be a powerful estate planning tool. By leaving it untouched, you allow a significant asset to grow tax-deferred for your heirs.
What Happens When You Inherit a Non-Qualified Annuity?
This is where the rules change, and it’s a critical gap in most people’s knowledge. While you, the owner, have no RMDs, your beneficiaries do have to take distributions.
💡 Michael’s Tip: The Spousal Exception
A surviving spouse is unique. They can typically choose to become the new owner of the annuity contract, a process called “spousal continuation.” If they do, the account continues to grow tax-deferred, and the “no RMD” rule continues to apply to them. It’s a powerful benefit for married couples.
For a non-spouse beneficiary, there are generally three options, as guided by IRS guidance:
- Lump-Sum Distribution:Â
The beneficiary takes the entire value of the annuity at once and pays ordinary income tax on all of the accumulated earnings in a single year. - The 5-Year Rule:Â
The beneficiary can withdraw the money in any increments they want, as long as the entire account is emptied by the end of the fifth year following the owner’s death. - Annuitization (The “Lifetime Stretch”):Â
The beneficiary can choose to turn the death benefit into a series of guaranteed payments over their own life expectancy. This “stretches” the tax liability over many years.
📚 Dig Deeper into Retirement Rules
- Learn if your RMD is considered earned income
Understand the critical tax distinction that affects your IRA contributions and Social Security. - What happens if you miss the RMD deadline?
Discover the steep penalties for missing a distribution from your qualified accounts and how to fix it. - Get a clear definition of what annuities are
My complete guide to understanding the pros and cons of different types of annuity products.
Now, try searching for: RMD penalty, inherited IRA rules, or annuity taxation.
Conclusion: Your Most Flexible Retirement Asset
In retirement planning, flexibility is freedom. While your IRAs and 401(k)s come with a strict set of government-mandated withdrawal rules, your non-qualified annuity does not. It is your “tax-control” account, a powerful tool that allows you to decide when and how you realize income.
By understanding that non-qualified annuities have no RMDs for you, the owner, you can move from being a passive rule-follower to a strategic planner. You gain the power to manage your tax brackets, control your healthcare costs, and build a more efficient legacy.
In my experience, that control is the cornerstone of a confident retirement.
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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.
