Do you have to take a non qualified annuity RMD?
A tax deferred annuity can be a great way to ensure a stream of income in retirement, but it’s important to understand the rules around IRA and non qualified RMDs, or required minimum distributions.
There is no one definitive answer to this question. It depends on what type of account in which the annuity is held and the specifics of the annuity contract. Generally speaking, though, non qualified annuities are not subject to required minimum distributions (RMDs).
Required Minimum Distributions or RMDs, are for the account that holds your funds. Not the investment itself.
In other words, RMDs are a requirement for qualified retirement plans such as an IRA. The investment that you hold does not require a minimum distribution. In this case, an annuity.
So if you hold the same investment outside of an IRA – there is no need for a non qualified annuity RMD. In other words, a non qualified annuity does not have an RMD since it is outside of an IRA.
I will explain this in further detail, so that you will have a full understanding of RMDs, annuities, non qualified annuities or any annuity outside of an IRA.
You may know by now that required minimum distributions must be withdrawn starting with your required beginning date after you turn age 72. From your IRA’s. But it gets a bit more complex from there.
- Roth IRA’s don’t have RMDs.
- If you are still working, you don’t have RMDs from your current 401k.
- Inherited IRA’s have different rules.
- A spouse ten years younger than you has different rules.
So let’s keep this simple and answer your question. Fair?
Related Readings:
Is There a Non Qualified Annuity RMD? Are Annuities Subject To RMD
Before we answer the question about non qualified annuity RMDs, we need to separate Annuities and IRAs
IRAs have required minimum distributions.
Is There an RMD For Non Qualified Annuities? Annuities Do Not Have An RMD
Let me explain with an analogy about cups.
Imagine I had rules about coffee mugs in my house. They must be purple. Only coffee mugs though.
Does it matter if you are drinking coffee or water from the mug?
No, the rule is the coffee mug must be purple.
So if you have to take an RMD from your IRA – that is the rule.
Not what investment is inside your IRA.
Annuities are not subject to RMDs, IRA’s have RMDs.
An annuity can be purchased within a qualified retirement plan, such as an IRA. And yes, this changes the criteria for required minimum distributions.
According to qualified plan rules, if you have made pretax contributions to the plan, your required beginning date is April 1st following your turning age 72. The payouts must be calculated depending on IRS life expectancy tables
Here is a recent article I wrote about the new IRS life expectancy tables for RMDs in 2022
Is There An Annuity RMD?
Due to confusion over the RMD rules. I get asked this question all the time.
Is there a non qualified annuity RMD or tax deferred annuities or TDA RMD age? No.
There is no RMD for a non qualified annuity or a tax deferred annuity. And no TDA RMD age.
UNLESS
The annuities are in a qualified retirement plan..
Annuities do not have RMDs. IRA’s do.
There is no RMD for a non qualified annuity.
So, Is There A Non qualified Annuity RMD?
No, why would there be one? Why would annuities be subject to RMDs? They aren’t.
IRAs have RMD. Not the annuity.
If you were at my house and I poured you a cup of coffee into a plastic cup – does the cup need to be purple? No, only coffee mugs need to be purple.
Not because I am drinking coffee. It’s a different cup, with different rules. So if I drink from a coffee mug, it needs to be purple.
And when I own an annuity inside of an IRA, then I have RMDs. A Non qualified annuity does not have an RMD.
So. IRAs have RMDs, required minimum distributions. There is no RMD for non qualified annuities.
Have I made this clear?
Non Qualified Annuity RMD
- With a Traditional IRA – you make pre tax contributions. The IRA is considered a qualified plan under ERISA
- You cannot make a pre tax contribution to a non-qualified annuity. Notice the terminology here. “Non qualified annuity”.
- The fact that it is non qualified means it is not under ERISA. Unlike ERISA-qualified retirement plans, the IRS does not require you to withdraw funds from your account at age 72.
Do Annuities Count Towards RMD? Does Annuitization Satisfy RMD Funds?
OK. So I get it. If I have a tax deferred annuity outside of an IRA, I do not have a required minimum distribution. Again, there is TDA RMD age.
But.
What if I do own an annuity inside of my IRA
Will my annuity count towards RMD? Do annuities count toward RMD?
Yes. Annuities count towards RMD. But it does get a bit more complicated.
Again, let me explain.
Starting the year you turn 72, you must take required minimum withdrawals from your IRA. RMDs are calculated by multiplying your IRA amount as of December 31st of the prior year by a factor dependent on your age (see IRS Publication 590-B).
If you have an annuity in your IRA, you may or may not have to include the value of the annuity when calculating your RMD. It’s important to know what kind of annuity you have.
There are several forms of annuities, but the most common are
- Immediate
- Lifetime
- deferred annuities.
RMDs are pretty simple for the first two, so let’s discuss those first.
Immediate Qualified Annuity RMD
An immediate annuity provides an immediate stream of payments that are normally paid out over the buyer’s lifetime. The RMD for the portion of the IRA money put in it is effectively covered by a lifelong stream of payments.
For example
Let’s say you have $500,000 in your IRA and buy an immediate annuity with $100,000.
The $100,000 is converted into a payment stream, and no longer an asset. It “has no value”to be included in the RMD calculation.
The RMD for the remaining $400,000 would still have to be calculated.
Qualified Longevity Annuity RMD
Longevity annuities are purchased with a lump sum of money today, with payouts beginning inr, the future. Usually at age 80 or 85.
QLACs, or qualified longevity annuity contracts, are commonly purchased using IRA funds using longevity annuities .
When calculating the IRA’s RMD, money held in an IRA QLAC is ignored. Any non-annuity holdings are used to calculate your RMD.
Qualified Deferred Annuity RMD
RMDs can be complicated if you own a deferred variable annuity in an IRA.
Whether or not the annuity has been “annuitized”—that is, made into a stream of payments, determines how you calculate the RMD.
Annuitizing a deferred annuity changes the restrictions
If the variable annuity is merely an asset in your IRA, its value must be factored into the RMD calculation together with non annuity holdings. Even if you are withdrawing some cash from the annuity, its value on the prior December 31 counts for RMD purposes.
The insurance company may provide you an RMD estimate based on the annuity account value – but that only covers your annuity. Not other assets in your IRA. The non annuity assets in your IRA would also need to be calculated.
Pro Tip
Many deferred annuities today are sold with bells and whistles. These riders offer appealing benefits. But I do want to warn you – you need to be careful managing your RMDs, and balancing them with these rider benefits.
Distributions can have a negative impact on annuity contract features like lifetime income riders and death benefits. It’s critical to understand how RMDs are handled and how they affect the policy when evaluating a variable annuity.
Related Readings:
- Find Out Now – Why Is RMD Considered Earned Income?
- Why Should I Aggregate My RMDs Right Now?
- How to Stop Worrying About Retirement Plan Distributions Now
- The Secrets to How Can I Reinvest My Required Minimum Distributions RMD?
- 9 Strategies – What To Do With RMDs I Don’t Need?
Annuitized Qualified Deferred Annuity RMD
Now, I mentioned a little earlier that when you annuitize it could impact your qualified deferred Annuity RMD. When a variable annuity is “annuitized”, the rules change.
The stream of payments are considered to cover the RMD for the IRA value represented by the annuity. For the non annuity holdings in your IRA, you still owe an RMD.
Pro Tip
If you annuitize a contract after being subject to RMDs, be careful to calculate the RMD for the first year of distributions. Your first-year RMD is determined using your prior-year account balance, and the total payments you receive during the first year of the annuitized contract must be equal to or greater than the computed RMD.
If they’re lower, you’ll have to make up the difference with non annuity holdings in your IRA.
In future years – the money tied up in the annuitized contract would be excluded from the IRA’s RMD calculation.
Why are Immediate Annuities exempt from RMDs?
RMDs are based on the account value from December 31st, correct? If so, what account value would you use for an immediate annuity? An immediate annuity has no “value” to use in an RMD calculation.
Secondly, the immediate annuity is designed to provide you an income over your life expectancy. Which is similar to the calculation of an RMD. So the RMD is considered satisfied, for the amount that was annuitized.
Related Readings:
- Do You Know When Annuities Have RMDs?
- 6 Reasons You Should Consolidate Your IRA Accounts Now
- How To Learn 6 Advantages To Having Multiple IRAs
- How Many IRAs Can I Have? Remarkably It Is Unlimited
- The Ultimate Guide to 2022 Tax Tables and IRA Contribution Limits
Are Fixed Annuities Subject To RMD
This is similar to asking “is my bond subject to an RMD?” As we learned earlier – the investment isn’t subject to the RMD – the account that holds the investment is.
As noted earlier – if your fixed annuity is outside of an IRA< then no you do not have to take an RMD.
If your fixed annuity is in a qualified plan like an IRA – then yes, it is likely subject to an RMD
What if my fixed annuity does not produce enough income to cover my RMD?
Again, it’s like a bond. Or a savings account. With interest rates so low, it is not uncommon for an investment to not produce enough income to cover your required minimum distribution for the year. If that were the case – you may need to liquidate a portion of your investment to cover your RMD.
Pro Tip
One common approach my clients used to like in a case like this would be to make one liquidation in early December. Then take the RMD for the year in December. And a second RMD in January of the next year.
Then the account has nearly two years to accumulate interest on its own until the next RMD is due.
How To Calculate RMD For Annuity? How Do You Calculate Minimum Distributions In An Annuity
Are you sick of me repeating myself yet? And my purple coffee mug? By the way, as foolish as that analogy is. I guarantee you will smirk one day when someone asks you about an annuity RMD. And all you can visualize is a purple coffee mug…
And if you now have the urge to buy a purple mug, you can help keep this website free. I’ll literally get a few whole cents if you buy one from this link
Anyway.
- If your Annuity is inside of your qualified account such as an IRA
- Immediate Annuity RMD? Nope, don’t need to calculate it
- If you annuitized it – it doesn’t count towards your RMD anymore
- Longevity Annuity RMD? Nope.
- Deferred Annuity RMD? Yes, calculate it
- Fixed Annuity RMD? Yes, calculate that too
- Non qualified Annuity RMD? No. There is no RMD for a non qualified account.
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