I’m in my mid-70s and I’m considering purchasing an immediate single premium lifetime annuity for myself using a portion of my regular IRA account as the source of the premium I would be paying. Having been notified of my 2024 RMD based on the Dec. 31, 2023, balance (assume the RMD is $50,000), do the annuity payments I receive during 2024 count toward that RMD? For example, if I receive a total of $25,000 in annuity monthly distributions in 2024, do I only need to withdraw $25,000 from my IRA by the end of 2024? Does it work differently in subsequent years?
– Howard
Thanks to the SECURE 2.0 Act of 2022, your annuity payments may count toward your required minimum distribution (RMD), depending on the type of annuity you have and the money you used to purchase it. Assuming they do, yes, you may only need to withdraw an additional $25,000 from your IRA to satisfy your $50,000 RMD.
Speak to a financial advisor about how your portfolio allocations can affect your retirement taxes.
Annuitizing a Portion of Your IRA
Annuitizing a portion of your retirement savings can ensure you have a stable source of retirement income. When you exchange a lump sum of money within your IRA for a single premium immediate annuity, or SPIA, you receive a guaranteed payment for life. For many, this protection from longevity risk can provide considerable stability, comfort and peace of mind.
However, IRAs require you to withdraw certain minimum amounts, called RMDs, once you reach a specified age (age 73 for people who turn 72 after Dec. 31, 2022). Previously, owning an annuity within your IRA could have left you with a larger RMD than if you had not annuitized. Fortunately, that problem has been addressed with the passage of the SECURE 2.0 Act. But keep in mind that the fixed payment you receive from the annuity may not be enough to cover your RMD as you get older and the size of your mandatory withdrawal potentially increases. If you need additional help managing your RMDs, consider speaking with a financial advisor.
Annuity RMDs and SECURE Act 2.0
Congress has laid out specific rules for calculating RMDs when you hold an annuity inside a tax-deferred retirement account. The rules have changed several times, most recently with the passage of the SECURE 2.0 Act.
Prior to the passage of the landmark retirement legislation, you would have removed the annuitized value from your account and treated it separately for RMD purposes. For example, if you had $500,000 in your IRA and used $200,000 to purchase an immediate annuity:
- The payments you received from the $200,000 annuity would have satisfied the RMD associated with the annuitized funds.
- But you also would have been required required to calculate and take an RMD separately from the remaining $300,000 balance.
If your annuity payments exceeded the amount you might otherwise have to take on the $200,000 had you had not annuitized it, you weren’t allowed to use it to offset the RMD on the remaining $300,000. Again, you effectively would have had two separate balances and two separate RMD requirements. This could have caused you to have a much larger RMD than if you didn’t have an annuity.
However, the SECURE 2.0 act allows you to treat the entire balance as one. As a result, you would look at the $500,000 total balance, calculate your RMD and simply subtract the annuity payments from that. This allows you to get “full credit” for any annuity payments and possibly reduce the total amount you’d have to withdraw from your remaining balances.
There is a potential practical limitation here. In order to calculate your RMD based on one combined balance and allow your annuity payment to count toward your total RMD, you need a valuation of your annuity as of December 31 each year.
Your annuity company may not provide that. If not, it isn’t yet clear how you are supposed to obtain that valuation. I expect the IRS will issue guidance on this point in future.
Get matched with a financial advisor to navigate the intricacies of retirement.
Bottom Line
The SECURE Act 2.0 allows you to count annuity payments toward the RMD on your total IRA balance, so long as you hold the annuity within the IRA. It also requires you to include a valuation of your SPIA in the RMD calculation.
Tips for Finding a Financial Advisor
- Hiring a financial advisor is a big decision. And like all big decisions, having more information at your fingertips can help you feel more confident as you navigate process. That’s why we put together our comprehensive guide on how to find and choose a financial advisor.
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column. Questions may be edited for clarity or length.
Please note that Brandon is not a participant on the SmartAsset platform, and he has been compensated for this article. Questions may be edited for clarity or length.
Photo credit: ©iStock.com/Elisank79, ©iStock.com/andresr