Retirement Income Security: How Annuities Impact RMDs
As you approach retirement, ensuring a stable income stream is crucial. One strategy to consider is purchasing an immediate single premium lifetime annuity using a portion of your IRA account. But how do annuity payments affect your required minimum distribution (RMD)?
Understanding RMDs and Annuities
Thanks to the SECURE 2.0 Act of 2022, annuity payments may count toward your RMD, depending on the type of annuity and the funds used to purchase it. This means that if you receive $25,000 in annuity payments in 2024, you may only need to withdraw an additional $25,000 from your IRA to satisfy your $50,000 RMD.
The Benefits of Annuitizing
Annuitizing a portion of your retirement savings can provide a guaranteed income stream for life, protecting you from longevity risk and offering stability and peace of mind. However, it’s essential to consider how annuity payments will impact your RMDs, especially as you get older and the size of your mandatory withdrawal potentially increases.
New Rules for Calculating RMDs
The SECURE 2.0 Act has changed the rules for calculating RMDs when holding an annuity inside a tax-deferred retirement account. Previously, you would have removed the annuitized value from your account and treated it separately for RMD purposes. Now, you can treat the entire balance as one, allowing you to get “full credit” for any annuity payments and potentially reduce the total amount you’d have to withdraw from your remaining balances.
Practical Limitations and Next Steps
To calculate your RMD based on one combined balance, you’ll need a valuation of your annuity as of December 31 each year. If your annuity company doesn’t provide this, it’s unclear how to obtain it. The IRS is expected to issue guidance on this point in the future. Consider speaking with a financial advisor to navigate the intricacies of retirement and ensure you’re making the most of your annuity payments.
Additional Tips for Retirement Planning
Remember to keep an emergency fund on hand to cover unexpected expenses. A high-interest savings account can help your emergency fund grow over time. Additionally, consider seeking the guidance of a financial advisor to help you achieve your retirement goals.
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