How do required minimum distributions (RMDs) work with annuities?

When you’re planning for retirement, annuities can be a useful way to create steady income. If you have an annuity within a tax-advantaged retirement account, like a traditional IRA or 401(k), there are some IRS rules to keep in mind—specifically around required minimum distributions, or RMDs.

If you ever find yourself wondering how these RMD rules affect annuities inside your retirement accounts, you’re not alone. Many people are surprised to learn there are actually ways to use these mandatory withdrawals to help themselves and others—from investing, legacy planning, to supporting loved ones and charitable causes. Let’s break down how RMDs work for annuities, share some tips for staying on track with your withdrawals and then share actionable, strategic ideas to help you make the most of your RMDs.

Do RMDs apply to annuities?

RMD rules generally apply to annuities held in tax-qualified retirement plans or accounts, such as traditional IRAs and 401(k) plans. An annuity purchased outside a qualified retirement account generally is not subject to RMD rules. It’s important to understand how RMD rules for annuities work to help avoid penalties. This is a great question to bring up during your annual review with your financial professional—they can help clarify which of your accounts are affected.

Understanding RMD rules for annuities

The amount withdrawn is based on IRS life expectancy tables and the annuity’s fair market value. Accounts that typically require RMDs include:

• Employer-sponsored retirement plans like pensions, 401(k) plans or 403(b) plans
• Profit-sharing plans
• Employee stock ownership plans (ESOPs)
• Traditional individual retirement accounts (IRAs)
• SEP IRA
• SIMPLE IRA
• 457(b) plans if money is contributed on a pre-tax basis

When do RMDs begin for annuities in retirement accounts?

In general, you must start taking withdrawals from retirement accounts when you reach age 73. Different timing rules may apply to employer-sponsored retirement plans, so consult your tax or financial professional about your specific accounts. Choosing an annuity with features that can help support RMD requirements can make this process easier and help you avoid penalties while keeping your withdrawal schedule on track.

How annuities can work with RMDs

Annuities in traditional retirement accounts are subject to RMDs and can offer steady, predictable income that may satisfy RMD requirements through withdrawals or when annuitized. Conversely, annuities in Roth IRAs are exempt from RMDs, allowing potential growth and future income without mandatory withdrawals. Reach out to your financial professional if you’re curious about whether an annuity with features that can help support RMD requirements makes sense in your overall retirement plan and you want to learn more.

Ideas for using RMD money

RMD rules require a person to start drawing income from qualified retirement savings accounts at a specific age regardless of whether the income is needed. While these withdrawals are mandatory, how the funds are used is up to you. Here are just some of the ways you could consider using the money:

Reinvest distributions

If the funds from retirement accounts are not needed, one option is to invest the withdrawals into a taxable investment account and allow the savings to grow over time.

Treat yourself

Consider using the funds for something meaningful, such as going on a dream vacation, completing a home renovation, or purchasing a new car.

Create an emergency fund

If an emergency fund hasn’t been established or if reserves have been depleted, this may be a good opportunity to start rebuilding that financial safety net for the future.

Pay for tuition

RMD funds can be used to assist with grandchildren’s college expenses. While paying tuition directly to the school doesn’t reduce taxable income, it may help avoid gift tax issues. Contributing to a 529 college savings plan could be another option even though no federal deduction results.

Pay life insurance premiums

If you don’t need the money from your RMDs for everyday expenses, you could use those funds to help pay premiums on a life insurance policy. The death benefit from a life insurance policy is generally paid income-tax-free to your beneficiaries and is typically outside of probate. If you already have a policy, RMDs can help cover ongoing premiums; if you’re considering new coverage, consult a financial professional to see if this approach fits your goals. This strategy allows your required withdrawals to support your legacy planning and potentially support certain legacy-planning goals.

Share with family

Giving money to loved ones may be a good option, but gift tax limits may apply. Consult your tax advisor to understand the best way to gift money to family members.

Give to charity

If there’s a charity or cause you're passionate about, donating RMD funds can be a great option. Eligible IRA owners may be able to satisfy all or part of an RMD through a qualified charitable distribution, or QCD. To qualify, the distribution generally must be made directly from the IRA to an eligible charitable organization. Meet with your tax advisor for more details on RMDs and charitable giving.

Considering annuities as part of your RMD strategy

Understanding RMDs, calculating these amounts, and following RMD rules are important to avoiding penalties and making the most of your hard-earned savings. Depending on the contract and account structure, annuity withdrawals or income payments may help satisfy applicable RMD requirements while supporting a broader retirement income strategy. As you plan for retirement and think about your future, consider meeting with your tax advisor. Need assistance with your retirement income plan? Visit Midland National’s Find an Agent page to be connected with a financial professional near you. They can help you gain the knowledge you need to feel more financially empowered when the next chapter begins.

Neither Midland National nor any financial professionals acting on its behalf should be viewed as providing legal, tax, or investment advice. Please rely on your qualified tax professional. Consult with and rely on a qualified professional. Under current law, annuities grow tax deferred. Annuities may be subject to taxation during the income or withdrawal phase. The tax-deferred feature is not necessary for a qualified plan. In such instances, you should consider whether other features, such as the Death Benefit, lifetime annuity payments, and any other features make the Contract appropriate for your needs.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals are independently contracted with Midland National and are insurance licensed that will be paid a commission on the sale of an insurance product.

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