Looking for RMD Relief? Try Qualified Annuities

Understanding RMDs in Qualified Accounts

A lot of Americans save for retirement in “qualified” accounts, which are retirement savings plans that meet guidelines established by the Employee Retirement Income Security Act (ERISA). — IRAs, 401(k)s, etc. Typically, these plans allow accountholders to contribute pre-tax dollars, and any earnings in the accounts grow tax deferred until distributions are taken. The government requires people to begin taking distributions, known as required minimum distributions, or RMDs, at age 73.

In 2022, U.S. lawmakers created a provision in the SECURE 2.0 Act that changed the treatment of RMDs.¹ Under this law:

• Payments received from a qualified annuity contract can be credited toward both the annuity RMD and the RMD for the qualified account that purchased the annuity
• A qualified annuity is purchased with pre-tax dollars from an IRA, 401(k), or other qualified account

How This Rule Can Benefit Retirees

Here’s an example describing how the rule change may benefit qualified annuity owners. Imagine that a fictional retiree, Jane, receives $10,000 a year in guaranteed income from her qualified annuity. At age 73, she must take a total of $7,000 in RMDs: $4,000 of that is related to the RMD for her qualified annuity (annuity RMD) and $3,000 is related to other assets held in the IRA that purchased the annuity (IRA RMD).

Under the old rule:  

• Jane’s qualified annuity income counts toward the annuity RMD. Since Jane’s annuity income ($10,000) is larger than the annuity RMD ($4,000), the income satisfies the annuity RMD
• The excess annuity income – the $6,000 that was not needed to satisfy the annuity RMD – does not count toward the IRA RMD, so Jane may have to withdraw $3,000 from her IRA

Under the SECURE Act:  

• Jane’s annuity income satisfies the annuity RMD
• The excess annuity income counts toward the IRA RMD. As long as the excess annuity income is greater than the IRA RMD, Jane may not have to take a distribution from her IRA.²

Annuity Owners Advantages of Qualified Annuities

The provision has the potential to deliver significant benefits to qualified annuity owners. For instance, annuity owners may be able to:

• Improve tax efficiency. RMDs are taxed as ordinary income. The distributions can push retirees into a higher tax bracket, which may affect the taxability of Social Security benefits, as well as the size of Medicare premiums.1 Under the rule, qualified annuity income could improve tax efficiency for some retirees.
• Keep more money invested. With life expectancy lengthening and inflation rising, it’s a good idea to keep money that’s not needed for income invested in a diversified portfolio with an appropriate level of risk. By potentially lowering RMDs, the new rule may help retirees keep more of their pre-tax dollars invested and working for them.
• Hold well-allocated retirement portfolios. Annuities can play an important role in retirement portfolios. For some, they provide a steady stream of guaranteed income. For others, annuities offer growth with principal protection. The old RMD rule penalized qualified accountholders who received annuity income. The refined rule levels the playing field and gives retirees the chance to hold the types of products that make the most sense for their particular situation.

The distributions can push retirees into a higher tax bracket, affecting the taxability of Social Security benefits and can increase Medicare premiums — qualified annuities may help reduce this burden.

Planning Ahead: Why Expert Guidance Matters

The benefits of the expanded rules are attractive. However, it’s important to remember that calculating the RMDs can be complicated, and applying the new rule adds another layer of complexity.  

As a result, it’s a good idea to enlist the help of an accountant and/or a financial professional to make sure you understand the nuances and make an informed decision.

DPL has several tools to help you learn more about commission-free annuities and see how these solutions fit in a retirement portfolio.

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¹ U.S. Senate. “Secure 2.0 Act of 2022”
² The change took effect after the law was enacted; however, the U.S. Treasury has not yet released complete guidance regarding all aspects of this RMD rule modification.
³ Taylor, Kelley. “Capital Gains in Retirement: Managing RMDs, Taxes, Social Security and Medicare.” Kiplinger.