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Annuities can help provide peace of mind during retirement, offering a predictable income stream and protection against the risk of outliving your assets.1 Depending on where your annuity is held, however, it may also help you satisfy your annual required minimum distributions (RMD) — giving your invested assets more time to potentially deliver tax-deferred growth.
“Many retirees are surprised to learn that income from an annuity can, in some cases, help satisfy their RMDs,” said John Kashmanian, a financial professional with Oceanstate Financial Services in Warwick, Rhode Island. “Using annuity income to meet RMDs can provide a strategic advantage for investors in their retirement years.”
The steady and predictable nature of annuity payments, he said, might enable retirees to cover required withdrawals without needing to sell other investments, which can be especially important during market downturns.
“This means the rest of your assets can remain invested longer, giving your portfolio balance time to potentially recover during market declines, which may help to reduce the impact of market volatility on your retirement plan,” said Kashmanian. “Depending on how the stock market performs, it may also allow your invested assets to remain in the market longer, which could provide the opportunity for long-term investment growth.”
To understand how annuities can potentially transform your RMD strategy, it helps to:
- Define RMDs.
- Explain how annuities work.
- Understand which types of annuities are subject to annual withdrawals.
Here are the specifics on each of these aspects.
What are RMDs?
An RMD is the minimum amount that the owner of a tax-deferred retirement account, such as a 401(k) or traditional IRA, must withdraw each year once they reach age 73, or age 75 beginning January 1, 2033. (Related: Turning 73? Required minimum distributions explained)
The IRS requires RMDs to prevent tax-advantaged retirement accounts from being used as permanent tax shelters or as vehicles for transmitting wealth to beneficiaries without ever being taxed. Because contributions to these accounts are generally made with pretax dollars and grow tax-deferred, the government eventually requires account holders to withdraw funds and pay the associated income taxes.
The amount of your RMD is determined by two things:
- Your projected life expectancy.
- The size of your account.
Withdrawals taken from tax-favored retirement accounts are generally taxed as ordinary income, which is based on your tax rate.
Note that Roth IRAs, which are funded with after-tax contributions, are not subject to RMD rules during the owner’s lifetime. As such, an annuity held within a Roth IRA would not trigger RMD obligations during the account holder’s lifetime.
RMDs for Roth 401(k)s were also eliminated by recent legislation, the SECURE 2.0 Act, as of 2024.
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What is an annuity?
An annuity is a contract with an insurance company in which you make either a single lump-sum payment or a series of payments. In exchange, the insurer agrees to provide you with a guaranteed stream of income. The income payments can begin immediately or at a future date and may continue for the rest of your and your spouse's life, or for a specified period, depending on the type of annuity. (Learn more: Different types of annuities explained)
Annuities can be used as a tool to convert accumulated savings into guaranteed retirement income, potentially mitigating one of the biggest concerns retirees face — the probability of outliving their money. That guarantee is based on the claims-paying ability of the issuing insurance company, which is why it's important to select a financially strong insurer with high ratings from independent agencies. (Related: What’s behind MassMutual’s financial strength?)
Annuities involve up-front fees and commissions and may include withdrawal limits, which may restrict the account owner’s access to funds. A financial professional can offer valuable guidance on whether an annuity might make sense for you.
“It’s always most important for older people to understand the financial products that they’re buying,” said Lisa Frankovich, a financial professional with GoldBook Financial in La Jolla, California. “When we’re running a financial plan for clients, we like to see at least 50 percent of their income coming from guaranteed sources. If you already have that amount covered from pensions or Social Security, you may not need an annuity.”
But those with 401(k) retirement accounts that fluctuate in value based on market performance, and those who are very conservative and like the security of predictable income, she said, may wish to consider annuitizing a portion of their savings so their essential living expenses are covered.
Where they purchase that annuity — meaning whether it’s inside a qualified retirement account or not — matters from an RMD perspective.
Qualified vs. nonqualified annuities: A critical distinction
Annuity products themselves are not inherently subject to RMDs. Only qualified annuities, which were purchased with pretax dollars, are subject to RMD rules.2
Indeed, it is important to distinguish between qualified and nonqualified annuities.
- Qualified annuities are those purchased inside a tax-deferred retirement account, such as a traditional IRA, 401(k), or 403(b).3 All withdrawals from these accounts — including annuity payments — are taxed as ordinary income. Once you reach your RMD age, you must begin taking minimum distributions from these accounts, whether they hold annuities or other investments. The RMD for annuities held within qualified retirement accounts is calculated by dividing the prior year’s fair market value of that account by a life expectancy factor determined by the IRS.
- Nonqualified annuities are purchased with after-tax dollars outside retirement accounts. Because you've already paid taxes on the money used to purchase the annuity, only the earnings portion of your withdrawals is subject to income tax. Nonqualified annuities are not subject to RMDs during the owner's lifetime.
More flexibility under SECURE 2.0 Act
A significant but lesser-known provision of the SECURE 2.0 Act made it easier to use annuity income to satisfy RMD requirements.
Prior to SECURE Act 2.0, those who purchased an income annuity with funds from their traditional IRA or 401(k) were only permitted to use the payments they received from that annuity to satisfy the RMD requirement for that specific annuitized account. If they had other retirement accounts, they would generally need to calculate and take separate RMDs from each account.
The new rule, however, now allows retirees to use annuity income from pretax accounts to satisfy RMD requirements for other qualifying retirement accounts.
Here's how: The value of the annuity contract gets included as part of your total account balance when calculating your overall RMD. If the annuity payments you receive during the year exceed the RMD that would have been required on the annuitized portion alone, that excess can then be applied toward your RMD for the remaining balance in the same account or for other qualified retirement accounts.
A hypothetical example might help to clarify.4
- John is a 74-year-old retiree with $250,000 in a traditional IRA that has been annuitized, from which he receives, say, $15,000 in annual annuity income.
- He also has a second traditional IRA invested in mutual funds worth $200,000.
- Under the new rule, John’s total RMD would be calculated based on the value of both accounts ($450,000 combined), which might require him to take an annual distribution of $17,000.
- Because he already receives taxable annuity income of $15,000 a year, he would only need to withdraw $2,000 from his other IRA.
So, John doesn’t have to tap his investment accounts as much as he would have otherwise.
More tax efficiency
The SECURE 2.0 Act provision offers several potential benefits for retirees who prioritize tax efficiency:
- It enables more of their tax-deferred assets to remain invested longer.
- It provides greater flexibility in managing their retirement income.
- It can simplify the RMD process by reducing the number of separate withdrawals they need to make each year.
Additionally, SECURE 2.0 Act expanded the types of annuities that can be used within retirement accounts by allowing:
- Qualified annuities to include features such as annual payment increases of up to 5 percent.
- Accelerated lump-sum distributions.
- Dividend payments.
These features were previously restricted under the old RMD rules.5
Qualified longevity annuity contracts (QLACs)
Yet another important annuity-related provision from the SECURE 2.0 Act involves qualified longevity annuity contracts (QLACs).
QLACs are deferred income annuities — purchased with qualified retirement funds — that can begin payments as late as age 85.
The key advantage of QLACs is that the amount invested in them is excluded from your account balance when calculating RMDs, which can potentially reduce your RMD obligations in early retirement. Payments are still taxable as ordinary income, however, when payments begin.
SECURE 2.0 Act made QLACs more attractive to some retirees by eliminating the previous 25 percent account balance limitation and increasing the maximum premium in 2026 from $125,000 to $210,000 (indexed for inflation). This enables retirees to potentially exclude a greater amount of assets from RMD calculations while securing guaranteed late-life income.
Conclusion
Understanding how annuities interact with RMDs, and the added flexibility that SECURE 2.0 Act introduced, is essential for effective retirement planning.
As with all retirement planning decisions, it's crucial to consult qualified financial and tax professionals who can evaluate your specific situation and help you determine whether incorporating annuities into your retirement strategy makes sense for your individual goals and circumstances.
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1 Guarantees are based on the claims‑paying ability of the issuing insurance company.
2 Annuity.org, "Nonqualified vs. Qualified Annuities: Taxation & Distribution," Updated Dec. 17, 2025.
3 Internal Revenue Service, “Retirement plan and IRA required minimum distributions FAQs,” Jan. 29, 2026.
4Example is not a prediction or guarantee of actual results and is not intended to represent the value or performance of any specific product.
5 Holding an annuity inside a qualified retirement plan does not create additional tax‑deferral since the account is already tax‑advantaged. The annuity will follow the plan’s existing tax rules, including taxation of withdrawals and any required minimum distributions.
