While many types of retirement plans offer tax-related advantages, it is important to remember that when the IRS giveth, it can also taketh away! This certainly holds true with regard to the required minimum distribution (RMD) rules.
After years of “deferring” taxes in traditional IRAs and employer-sponsored retirement plans, it comes time to, as they say, pay the piper. And Uncle Sam knows exactly when he is going to get “his” money, based on distributions that must begin at a specific time.
How the RMD Rules Work
Required minimum distributions, or RMDs, refer to the money that must be taken out of traditional IRAs and certain types of qualified retirement plans – including 401(k)s, 403(b)s, 457s, and Simplified Employee Pension / SEP IRA accounts – once you have reached age 72. Another financial vehicle that is included in the list of those that must abide by the RMD rules is the qualified annuity.
Qualified annuities are funded with pre-tax dollars, which means that the contributions are deducted from your gross earnings, and thus are not subject to income taxes. Likewise, the earnings in the account grow tax-deferred. So, upon withdrawal, the funds that are accessed are 100% taxable.
The amount of the withdrawals that must be accessed via your required minimum distributions are based on an IRS formula that takes into consideration the following criteria:
- 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)
Because one of the parameters is the account value at the end of the prior year, the amount of the required minimum distribution can differ from one year to the next.
It is important to note that non-qualified annuities are not subject to the IRS required minimum distribution rules. Therefore, there is no particular age at which withdrawals must be taken (unless it is stipulated by the insurance carrier).
Does an Annuity Belong in Your Retirement Plan?
There are many types of financial vehicles and accounts that are available to help you save for retirement. Because these can all have pros and cons, it is important to know what you can anticipate in both the short- and long-term before committing to move forward.
In order to determine whether or not an annuity is right for you and your objectives, it can help if you discuss your pre-and post-retirement needs with an annuity specialist. At Annuity Gator, our mission is to educate consumers and financial advisors on these financial vehicles, how they work, and where they may or may not fit into various portfolios.
Therefore, if you’d like to learn more about annuities and compare the options that may be available to you, please feel free to contact Annuity Gator by phone at (888) 440-2468 or via email by going to our secure online contact form. We look forward to hearing from you.
