At What Age Do I Have to Withdraw From My Annuity?
Navigate the essential rules and timing for mandatory annuity withdrawals to manage your retirement funds wisely.
An annuity represents a contractual agreement with an insurance company, structured to provide a regular stream of payments, often for retirement income. Individuals typically fund annuities with either a single lump sum or a series of payments. The funds within an annuity generally grow on a tax-deferred basis, meaning taxes on earnings are postponed until distributions begin. Understanding the rules governing these withdrawals becomes an important aspect of managing financial resources.
Understanding Required Withdrawals
Required Minimum Distributions (RMDs) are specific rules dictating when and how much money must be withdrawn annually from certain retirement accounts, including annuities. These rules primarily apply to qualified annuities, which are those held within tax-advantaged retirement plans such as Individual Retirement Accounts (IRAs) or 401(k)s. The underlying principle for RMDs is to ensure that the government eventually collects taxes on funds that have benefited from tax-deferred growth over time.
Non-qualified annuities, however, are exempt from RMD rules. These annuities are purchased with after-tax money, outside of formal retirement accounts. The earnings portion of any withdrawal remains taxable as ordinary income.
Qualified annuities are funded with pre-tax dollars, allowing contributions to potentially reduce current taxable income, but all withdrawals are taxed as ordinary income. Non-qualified annuities, funded with after-tax dollars, do not offer an upfront tax deduction on contributions, but only the earnings are taxed upon withdrawal.
Determining the Mandatory Withdrawal Age
The age at which individuals must begin taking Required Minimum Distributions from qualified annuities has undergone changes due to recent legislation. Currently, for most individuals, RMDs must commence when they reach age 73. This age was increased from 72 by the SECURE Act 2.0, which became effective on January 1, 2023. Individuals born in 1950 or earlier followed previous RMD age rules.
The specific deadline for the first RMD is known as the “Required Beginning Date” (RBD). This date is April 1st of the year following the calendar year in which you turn the mandatory withdrawal age. For example, if you turn 73 in 2025, your first RMD for the 2025 tax year must be taken by April 1, 2026.
After the initial RMD, all subsequent annual RMDs must be taken by December 31st of each year. Failing to take the full RMD by the deadline can result in a penalty, which is currently 25% of the amount not distributed, and may be reduced to 10% if corrected promptly.
Calculating Your Mandatory Withdrawal Amount
The specific dollar amount of a Required Minimum Distribution from a qualified annuity is determined using a formula that considers the annuity’s value and the owner’s life expectancy. The Internal Revenue Service (IRS) provides life expectancy tables, most commonly the Uniform Lifetime Table, to calculate the distribution period.
The general calculation involves dividing the annuity’s account balance as of December 31st of the previous year by the life expectancy factor corresponding to the owner’s age in the current year. For instance, if an annuity had a value of $100,000 at the end of last year and the owner’s life expectancy factor for their age this year is 23.7, the RMD would be approximately $4,219.41. The required withdrawal amount changes annually as the life expectancy factor decreases with age.
For immediate annuities held within qualified accounts, the payments themselves can satisfy the RMD requirements. If the annuity payments are structured to meet or exceed the calculated RMD, additional withdrawals may not be necessary. The insurance company typically handles the calculation to ensure the payments fulfill the RMD obligation. However, if the payments are less than the RMD, additional withdrawals from other non-annuitized qualified assets may be needed to cover the difference.
Rules for Inherited Annuities
Inheriting an annuity involves specific Required Minimum Distribution rules that differ based on the beneficiary’s relationship to the original owner. Spousal beneficiaries generally have the most flexibility. A surviving spouse can roll the inherited qualified annuity into their own IRA or treat it as their own. This allows them to defer distributions until they reach their own RMD age, or even name new beneficiaries.
Non-spousal beneficiaries, for annuities inherited from owners who died on or after January 1, 2020, are subject to the “10-year rule” under the SECURE Act. This rule mandates that the entire inherited annuity balance must be distributed by December 31st of the 10th year following the original owner’s death, but the entire account must be emptied by the deadline.
There are exceptions to the 10-year rule for “eligible designated beneficiaries.” This category includes minor children of the deceased owner, disabled or chronically ill individuals, and individuals not more than 10 years younger than the original owner. These beneficiaries may be able to stretch distributions over their own life expectancy.