Turning 73 marks an important financial milestone for retirement planning. 73 is the age when the IRS initially requires a percentage of funds be withdrawn from an IRA or employer-sponsored retirement plan on an annual basis. Most investors know this as the required minimum distribution (RMD) rule[1]. The purpose is to collect income taxes on every withdrawal since these accounts previously enjoyed tax-deferred growth, often for several decades.
Investors have utilized a wide range of accounts to provide tax-deferred benefits, including annuities, to help manage income during the retirement and RMD years. Annuities can help manage income through a process called annuitization. This is the process where account owners make an irrevocable decision to trade in the full annuity account balance for lifetime periodic payments, akin to a pension. However, RMD rules exclude annuity income from helping to satisfy your RMD obligation if an annuity has been annuitized. This law made it difficult for RMD-age individuals to properly coordinate how their overall RMD was satisfied.
When Secure Act 2.0 was passed in 2022, it changed this, allowing RMD coordination between annuitized and non-annuitized retirement accounts. Let’s look at how the old RMD rule worked first:
Nicky just turned 73 and has an IRA that held a value of $200,000 at the end of the prior year, plus another $250,000 IRA annuity that was annuitized and pays her $14,000 each year. Under the old rules, the IRS required Nicky to withdraw $7,547 from her $200,000 non-annuity IRA, and the annuitized income from her IRA annuity—the $14,000—was not allowed to count toward satisfying her overall RMD. That meant Nicky was required to withdraw a total of $21,547 in taxable income.
Even if Nicky did not want to take out $21,547 in income, she did not have a choice. Under the old rules, the IRS ignored the annuity value once it was annuitized. Secure Act 2.0 significantly changed that. Now, annuity values and their income are included in the RMD calculation. Here is how the new rule works:
Nicky can now add both the IRA annuity value of $250,000 and the $200,000 non-annuity IRA together when calculating the withdrawal requirement. Nicky’s required distribution is now $16,981 from the combined accounts. With the annuity already paying $14,000, Nicky would be required to withdraw only $2,981 from the non-annuity IRA. This lowers the required distribution by $4,566.
The new, improved RMD calculation rule saves Nicky thousands of dollars in needless (taxable) distributions. That means Nicky is now able to preserve more of her IRA investments for future use or future generations while also paying less in taxes this year.
Deciding on an income plan and how to meet the RMD requirement under the new rules will vary based on the financial situation and goals of the investor. Consult with your financial professional for assistance in deciding which plan is right for you.
[1] Income from employer-sponsored plans cannot be used to satisfy the IRA RMD obligation.
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