Introduction To RMDs for Annuities
How RMDs Impact Your Retirement Investment Strategy
If you are nearing or in retirement, you may be considering an annuity as an investment option. Annuities offer tax-deferred growth and the potential for guaranteed income that you cannot outlive. However, it’s important to understand the rules for required minimum distributions (RMDs) for annuities.
What are RMDs and when do they apply to annuities?
RMDs apply to annuities that are housed within a separate IRA, 401(k), or other retirement account. The age at which you must begin taking RMDs depends on when you turned 70.5. For example, if you turned 70.5 in 2019, you must take your first RMD at 70.5. However, if you turned 70.5 in 2020 or later, your first RMD must be by April 1 of the year after you turn 73. The SECURE Act of 2019 increased the RMD age from 70½ to 72 years. Last year the SECURE 2.0 Act of 2022 once again delayed the RMD age from 72 to 73 starting in 2023. In 2033, the RMD age will increase to age 75.
RMDs are calculated based on your portfolio size, age, and expected lifespan according to the IRS’ “uniform lifetime table”. Not taking the required amount by the deadline can result in a steep excise tax penalty of 50%.
The impact of holding annuities in qualified retirement accounts
It’s also important to note that annuities held in Roth IRA and Roth 401(k) accounts do not require minimum distributions, so they are not subject to RMDs. When you hold an annuity in a qualified retirement account, you lose out on several benefits such as no contribution limits, and tax-advantaged withdrawals.
Different types of annuities and their features
When considering an annuity, it’s important to understand that there are different types of annuities with different features and benefits. The two main categories of annuities are fixed annuities and variable annuities. Fixed annuities have a guaranteed interest rate, while variable annuities have payments based on the investment performance of a portfolio of securities. Annuities can also come with a variety of riders or add-ons that can provide additional benefits such as death benefit, long-term care benefits, and guaranteed income benefits, but at an additional cost.
Tax implications of annuities and RMDs
It’s important to understand the tax implications of annuities as well. Annuities are tax-deferred, which means that taxes on the growth within the account are deferred until the money is withdrawn. When money is withdrawn from an annuity, it is taxed as ordinary income. If money is withdrawn before the age of 59.5, a 10% penalty tax may also apply.
Conclusion: Consulting a financial advisor for annuity and RMD strategies
In conclusion, if you are thinking about investing in an annuity, it’s important to understand the RMD rules and how they may impact your investment strategy. It’s always a good idea to consult with a financial advisor to make sure you understand the features and benefits of annuities and how they fit into your retirement planning. To ensure that your investment strategy is optimized for your retirement plan, it’s important to understand the RMD for annuities and how it applies to your investment.