The IRS has a lot more pull on retirement planning than many people think. While investors are oftentimes eligible to make pre-tax contributions into certain types of savings plans – and the funds in various accounts are allowed to grow on a tax-deferred basis – Uncle Sam will at some point want the taxes that he is due.
This is where the required minimum distribution, or RMD, comes in. The RMD refers to the amount of money that must be withdrawn from certain types of qualified retirement plans once they’ve reached age 72.
These plans include the traditional:
- SEP (Simplified Employee Pension) IRA
- SIMPLE (Savings Incentive Match Plans)
- Profit-Sharing plans
- Defined benefit pension plans
- Cash balance plans
- Qualified annuities
There are some exceptions to the required minimum distribution rules. These are typically Roth plans and non-qualified retirement accounts that include the following:
- Roth IRA
- Individually owned investments (such as stocks, bonds, mutual funds, CDs)
- Checking accounts
- Savings accounts
- Non-qualified retirement plans
- Non-qualified annuities
So, as it pertains to annuities and RMDs, those that are held in qualified plans – such as traditional retirement accounts – will be subject to the required minimum distribution rules. On the other hand, non-qualified annuities (i.e., those that are owned in individual accounts) are not.
How to Calculate the Amount of a Required Minimum Distribution
The IRS has a specific formula that is used for calculating the amount of a required minimum distribution each year. (Note that the amount of the RMD is not the same every year). This calculation is based on:
- The value of the account at the end of the previous year
- Your age, as it pertains to the uniform lifetime distribution period (although different situations may call for different calculation tables)
It is also important to note that you can be penalized if you withdraw less than the amount of your RMD in a given year (as well as if you do not withdraw any amount at all). However, there is no penalty for withdrawing more than the RMD amount.
The IRS provides RMD worksheets on its website to assist with determining how much is necessary to withdraw. It is also recommended that you discuss any required minimum distribution questions that you have with a tax professional.
Is an Annuity Right for Your Retirement Plan?
Based on how an annuity is owned, it may or may not be subject to the IRS required minimum distribution rules. But even so, these financial vehicles can provide you with a long list of benefits, which include tax-deferred growth of the funds inside of the account, and income that lasts for a preset period of time, or even for the remainder of your lifetime, regardless of how long that may be.
There are many different types of annuities, though, so it is important to have a good understanding of how they work, and which one(s) may or may not be right for you, based on your objectives, risk tolerance, and time frame until retirement.
If you would like to learn more about annuities, as well as compare various annuity options, feel free to contact Annuity Gator and chat with an annuity specialist. At Annuity Gator, our mission is to educate consumers and financial professionals on how annuities work, and where they may fit in with other assets in a portfolio.