Advanced planning

Simplifying RMDs using annuities

This is a condensed guide of Required Minimum Distribution (RMD) rules and how annuities can help simplify the RMD process.

An RMD is money that must be withdrawn from a retirement savings plan each year once the account holder reaches a certain age. If your client owns a qualified account such as a traditional IRA or 401(k), once they turn 73, the deadline to take their first RMD is April 1 of the following year, with some exceptions for 401(k) accounts. And subsequent RMDs must be taken by Dec. 31. Starting in 2033, the RMD age will increase to 75.

Remember to aggregate accounts of the same type to determine your client’s total RMD. Also note that they may satisfy RMDs by taking a distribution from any number of their accounts of the same type. Failing to take RMDs on time will generally result in considerable penalties. Although the IRS has waived penalties for missed RMDs on inherited accounts through 2024, there is no expectation that it will continue to do so in 2025 or thereafter.

Annuities and consolidating RMDs

Consider using an Income Annuity to help satisfy your client’s RMDs. At age 73, their RMD will be less than 4% of all their qualified accounts’ values, under current RMD regulation. For example, say your client has three traditional IRAs, each with a $100,000 year-end value. That means their first RMD for the aggregate accounts is $11,320. Now consider using two of their IRAs to purchase an AuguStar Orbiter annuity with an income rider¹ paying 7.1% (single option) at age 73. That will equal more than $14,000 of income in the first year of distributions, more than satisfying the RMD for not only the two IRAs moved into the annuity, but also the RMD for the third account left outside of the annuity. This avoids disrupting the growth of that last IRA. Finally, the AuguStar rider increases income on a yearly basis, which helps keep pace with potentially growing RMDs.

Inherited accounts

For inherited qualified accounts, the RMD rules depend on the designation of the beneficiary. Eligible designated beneficiaries (EDB) include minor children, individuals with disability or chronic illness, any other individual who is not more than 10 years younger than the original account holder, and spouses.

EDBs have the advantage of a stretch option, allowing them to withdraw the account balance over their life expectancy. Although, minor children must switch over to the ‘out in 10’ rule once they reach age of majority. Spouses have additional options. For example, a surviving spouse can uniquely elect to roll over the inherited assets into an existing or new IRA in their own name. Alternatively, a surviving spouse can transfer assets to an inherited IRA, with the added benefit of accessing the asset even if they’re younger than 59½.

Finally, non-EDBs must empty the inherited qualified account balance within 10 years of the original owner’s death. If RMDs had not kicked in for the original owner, there are no mandatory distributions until the end of the 10-year period. If RMDs had kicked in, the beneficiary will have to continue taking RMDs each year based on their own life expectancy (if younger than the decedent), while still adhering to the ‘out in 10’ rule. As mentioned, penalties for missed RMDs on inherited accounts have been waived in prior years but will likely not be waived in 2025 or thereafter.