Annuity RMD Strategies

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Required minimum distribution (RMD) rules for individual retirement accounts (IRAs) may bother you if you don't need the money and don't want to pay the taxes. Compliance is not a choice. It's the law.

A few annuity strategies exist that may address your future RMD issue. Knowing all of your options lets you choose the right RMD strategy for you.

Key Takeaways

  • The IRS will look at the total dollar amount of your qualified accounts to tally your required minimum distribution for each year.
  • Attaching a death benefit rider to an annuity you don't plan to tap into for living expenses can guarantee you a minimum rate of return. This should let you offset your RMDs.
  • You might also apply your RMDs toward the purchase of a life insurance policy, The death benefit of this could pass tax-free to your beneficiaries.
  • This tactic could also apply to the purchase of a flexible-premium fixed annuity with a guaranteed death benefit rider.

Required Minimum Distribution

Required Minimum Distribution (RMD) is the amount of money you must remove from a traditional IRA, SEP IRA, or other qualified accounts when you reach the age of 72. The previous age for RMDs was 70½, but that was increased in 2019 with the passing of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). People who turned 70½ in 2019 still had to take their RMD, but those who turned 70½ in 2020 could wait until age 72 to take their RMD.

Whether you have one IRA or 10 separate IRAs, the IRS will look at the total dollar amount of your qualified accounts to calculate your RMD annual payment. Your RMD can be deducted from one IRA or from multiple qualified accounts. You just need to meet the IRS dollar requirement .

Annuity Death Benefit Rider Strategy

Some IRA owners don’t plan on ever accessing the money in their IRA, aside from the RMD. Instead, they plan to leave the bulk of their IRA to beneficiaries as a legacy. This can be done by using a contractually guaranteed death benefit rider attached to a fixed annuity. 

A guaranteed death benefit rider costs an extra yearly fee. In exchange for your fee, you receive a base level interest rate guarantee.

Let’s say you have $300,000 in a traditional IRA, and you never plan on using that asset to live on in retirement. You place that money in a fixed annuity with a contractual death benefit rider that guarantees 5% growth. The $300,000 will grow and compound by that amount every year. This offset strategy lets you take your RMDs ​while keeping your initial IRA total dollar amount intact for your listed beneficiaries and heirs. The growth should outpace your RMDs.

You may have to pay taxes on an annuity purchased with IRA funds, depending on whether you use pre-tax or after-tax money. Consult a trusted financial advisor or accountant first so you know what to expect.

An RMD calculator can help you decide if this is a good strategy for you. If this seems like a feasible option for your investment goals, the sooner you start this strategy before you turn 72, the better. Your initial investment can grow by an annual 5% before you are required to take your RMDs.

Maximizing Your RMDs With Life Insurance

Another creative strategy to maximize RMDs is to apply those annual dollar amounts to the purchase of an annuity or life insurance policy. If you qualify for life insurance, this would be the first choice because the death benefit would pass tax-free to your listed beneficiaries. It also leverages your money by letting you purchase a policy that pays out much more than the premiums you pay into it.

Figure out what the after-tax dollar amount would be from your RMD. Then buy as much life insurance death benefit with that as possible. Term life insurance is a low-cost option, but it will either stop at the end of your term or require increased premiums if you have a renewable policy. Single-premium whole life works well if you qualify. You pay a premium once, and then the policy is in effect for your lifetime, passing to your beneficiaries when you die.

Flexible-Premium Annuities

If you do not qualify for life insurance, the same strategy can be used to buy a flexible-premium fixed annuity with a guaranteed death benefit rider attached to the policy. A flexible premium means you can add money to the policy. This annuity strategy is another very effective way to use your RMDs. Note the death benefit will not pass tax-free to your beneficiaries, as with life insurance.

Having to take your Required Minimum Distributions (RMDs) need not be painful—an annuity solution may exist that will fit your overall legacy plan beautifully.

Article Sources

  1. IRS. "Retirement Plan and IRA Required Minimum Distribution FAQs."

  2. House Committee on Ways and Means. "The Setting Every Community Up for Retirement Enhancement Act of 2019 (The SECURE Act)," Page 3.

  3. TIAA. "Minimum Distribution Calculator."

  4. New York State Department of Financial Services. "Types of Policies."

  5. Insurance Information Institute. "Annuities Basics."