Annuities and RMDs: What Retirees Need to Know

The Core Rule

If your annuity was purchased with IRA money (a qualified annuity), it's still subject to Required Minimum Distribution rules once you reach the applicable RMD age, the same as any other IRA asset. Buying an annuity doesn't create an exemption — a common misconception.

How RMDs Are Calculated With an Annuity

For most IRA assets, your RMD is calculated by dividing your account balance by a life-expectancy factor from the IRS's published tables. With an annuity inside an IRA, the "balance" used for that calculation may include the fair market value of the contract, which can factor in any additional benefits the contract provides, not just the surrender value.

This calculation can get more nuanced than a simple brokerage account, which is exactly why it's worth getting right — both your custodian and the insurance carrier are typically involved in reporting the correct value.

If Your Annuity Is Already Paying Income

If you've annuitized the contract — converted it into a stream of regular payments — those payments themselves generally satisfy the RMD requirement for that contract, as long as they're calculated using an IRS-approved method. This is one of the simplifying features of turning an annuity into an income stream at the right time.

The Penalty for Missing an RMD

Missing a required distribution, or taking less than required, can trigger an excise tax on the shortfall. The exact rate has changed with recent tax law updates, so this is a case where confirming the current figure with a tax professional matters — the details shift, but the penalty is real enough that it's worth staying on top of the deadline every year.

Coordinating Across Multiple Accounts

If you own more than one IRA — say, a traditional IRA at a brokerage and a qualified annuity — RMDs from IRAs can generally be aggregated and taken from any one (or combination) of your IRA accounts, as long as the total required amount is withdrawn. Annuitized qualified contracts are typically the exception; their income requirement usually has to be satisfied from that specific contract.

Why This Matters When Choosing a Term

If you're approaching RMD age and considering a MYGA, it's worth thinking about the term length relative to your RMD start date. A 10-year MYGA purchased with IRA money that starts requiring distributions in year three means you'll likely be taking withdrawals during the surrender period. Most contracts' free-withdrawal provisions are built with this in mind, but it's worth confirming before you commit to a term.

The Bottom Line

An annuity funded with IRA money doesn't step outside RMD rules — it just adds a layer of calculation that's worth getting right, ideally with your tax professional and your advisor coordinating together. If you're weighing a term length against an approaching RMD age, that's exactly the kind of question worth asking before you buy, not after.