Are Minimum Distributions Required From an Annuity?

Retirement plans that are qualified under the Employee Retirement Income Security Act (ERISA) may be subject to a required minimum distribution at some point during your lifetime. But, annuities are insurance products. Even though they are taxed as retirement accounts, they are not normally subject to the required minimum distributions of retirement accounts.

Function

Annuities are, at their core, insurance policies. Immediate annuities guarantee you an income at retirement, while deferred annuities provide either guaranteed or non-guaranteed savings accumulation, with the option to convert the savings to guaranteed income payments. As such, these contracts are not qualified under ERISA rules, and not subject to the required minimum distributions required by the IRS for certain qualified retirement plans.

Benefit

Because annuities are not technically retirement plans, they do not have limitations on the contributions that may be made to them. All contributions are made with after-tax dollars. Additionally, all money inside the plan is income tax-free. Investment gains, however, are taxed when withdrawing money from the contract. But, because you can hold the contract indefinitely without being forced to withdraw money, you can accumulate a significant amount of money that may be used in your advanced age or given to your children as an inheritance.

Exception

The only exception in regards to required minimum distributions is when the annuity is part of a traditional qualified retirement plan. Examples of this would be a 412(i) plan, or a traditional IRA which holds an annuity as an investment. These accounts are required to make distributions at age 70 1/2. Even though annuities are exempt from the required distribution, the rules governing qualified retirement plans must be followed in these circumstances. Thus, you may be forced to make required distributions from your annuity according to table III in the appendix of IRS publication 590.

Consideration

If you want to avoid forced distributions, you should avoid purchasing an annuity inside of a traditional IRA. 412(i) plans are pensions that are managed by employers, so there is nothing you can do about these plans as an employee. If you still like the idea of using a qualified retirement plan, you may choose a Roth IRA. Roth IRAs are not subject to required minimum distributions. Roth accounts are also exempt from taxation when making withdrawals during retirement. They do impose contribution restrictions, but the tax-free income from the Roth will eliminate a potential downside to the annuity.