Annuity in an IRA: how required distributions and income riders mix

An annuity held inside a traditional IRA does not get its own set of withdrawal rules. The IRA owner owes a yearly required distribution once the starting age arrives, and the annuity is simply one of the assets the IRA holds. The complication is that the annuity may carry an income rider with its own limits on withdrawals, a surrender schedule and a contract value that is not always the same number as the account balance. These questions and answers take the common points of friction one at a time.

The numbers below are hypothetical, and tax rules change, so confirm the current figures with the IRS or a tax professional before acting. For the broader question of whether an annuity belongs in an IRA at all, see the guide on Should you put an annuity in an IRA?.

The basics

Does an annuity inside an IRA have its own required distribution?

Not separately. A required minimum distribution is calculated for each traditional IRA owner, based on the value of the IRA at the end of the prior year and a life-expectancy factor published by the IRS. An annuity inside the IRA is a qualified annuity, and its value counts toward the IRA's balance. The owner, not the insurer, is responsible for making sure enough is withdrawn.

The starting age is 73 under current law, rising to 75 for people born in 1960 or later. A Roth IRA has no required distributions during the original owner's life, so the questions below apply to traditional IRAs, and to similar pre-tax accounts with their own rules.

How is the distribution figured for a deferred annuity that has not started paying income?

The usual method divides the prior December 31 value by the distribution period from the IRS Uniform Lifetime Table. Take a hypothetical 73-year-old whose IRA annuity was worth $300,000 on December 31. The IRS table shows a distribution period of 26.5 years at age 73 (confirm the figure in the current IRS Publication 590-B, because tables can be updated). The required distribution is $300,000 divided by 26.5, or $11,320.75.

The calculation is simple. What goes into "the value" is where annuities can differ from other assets, which is the next question.

Is the value for this purpose always the account balance?

Not always. For a contract that has not been annuitized, the value used for required distributions is the contract's fair market value, and IRS regulations allow that figure to include more than the cash account balance when the contract promises additional benefits. A death benefit larger than the account value, or certain guarantees, can add to the figure. Many insurers also report a value for this purpose that reflects such features.

In practice, the insurer reports the year-end value to the IRS on Form 5498 and typically either tells you the required amount or offers to calculate it. If the figure on that form is higher than your statement balance, ask the company to explain the difference in writing. A higher figure means a higher required distribution. Do not compute the number from your own statement and assume it is right.

Do I have to take the money from the annuity itself?

No. Traditional IRAs can be added together for the purposes of the calculation. You work out the required amount for each IRA, add them up, and withdraw the total from any one IRA or any mix of them. That means someone with an IRA annuity and a separate IRA invested in funds can take the whole distribution from the funds and leave the annuity untouched.

This flexibility does not extend to every account. A 401(k) must generally satisfy its own requirement separately, and a Roth IRA does not count at all. If the IRA annuity holds a guarantee you want to protect, taking the distribution elsewhere is one way to do it, which leads to the next group of questions.

When there is an income rider

What is the problem with an income rider?

A lifetime withdrawal rider promises that you can withdraw a set percentage of a "benefit base" each year for life. The base is a formula number, not an account balance, and the percentage is the allowed yearly amount. The rider's promise holds as long as you stay within the limit. Withdrawals above the allowed amount, called excess withdrawals, can reduce the benefit base and so reduce the future income. The details are in the guide on guaranteed lifetime withdrawal benefit riders and the post on benefit base versus account value: the number income riders really use.

An RMD is a required withdrawal, so it can collide with the limit. If the required amount from this contract exceeds what the rider allows, the question is whether the contract treats the excess as an excess withdrawal.

Can taking my required distribution break the rider?

It can, depending on the contract. Many contracts include a provision that lets you take the required distribution for that contract without it counting as an excess withdrawal, even if it is above the rider's yearly limit. Others apply the allowance only up to the amount computed on the contract's own value, or exclude amounts caused by other IRAs. Some require a written election. The contract rider will say.

Here is a hypothetical to show the stakes. Say a contract has a benefit base of $200,000, an account value of $160,000, and a rider that allows 5 percent of the base per year, or $10,000. The required distribution from this contract is $12,000. If the contract does not protect required distributions, $2,000 of the withdrawal is an excess.

How an excess lowers the base varies by contract:

• Dollar for dollar: the base falls by $2,000, to $198,000, and the allowed 5 percent drops to $9,900.
• Proportional: the excess is compared with the account value left after the allowed withdrawal ($160,000 minus $10,000, or $150,000). $2,000 divided by $150,000 is about 1.33 percent, and the base falls by that share, about $2,667 ($200,000 times 0.01333), to roughly $197,333.

Neither result is dramatic in one year, but repeated every year the effect compounds, and the proportional method hits harder when the account value is low relative to the base. This is why you should read the clause, not rely on a summary.

Does the required distribution count as starting the income?

In some contracts, yes. If you have not yet "turned on" the rider, a withdrawal can be treated as the first rider withdrawal, which fixes the percentage at your age and starts the lifetime payments. That might be what you want or the opposite. Ask whether a required distribution before the income start date triggers the rider, or can be taken without it.

Surrender charges, taxes and withholding

Do surrender charges apply to a required distribution?

Many contracts waive surrender charges on required distributions, and most also have a free withdrawal provision that allows a percentage of the value each year without a charge. Not every contract is the same. The percentage a required distribution takes is small at first (the $11,320.75 above is under 4 percent of $300,000) and grows with age, so it usually fits inside a typical free-withdrawal allowance in the early years, but a contract with a smaller allowance could still charge on the excess. Before you buy or when you reach the starting age, confirm that required distributions are exempt. The guide on annuity surrender charges and free withdrawals explains the schedule.

How are the withdrawals taxed?

Distributions from a traditional IRA annuity are generally ordinary income, because the money went in before tax. The exception is a contract with nondeductible contributions, where part of each withdrawal is a return of that basis. A Roth IRA annuity follows Roth rules. The tax treatment of annuities in general is in how annuities are taxed.

Federal withholding on an IRA distribution is generally 10 percent unless you choose a different amount. The default may be too low or too high for your situation, and a tax professional can help you set it.

What if I miss the deadline or take too little?

The IRS excise tax on a missed required distribution is 25 percent of the shortfall, reduced to 10 percent if the shortfall is corrected within a limited window (two years under current law, according to the IRS). The tax is on the amount you should have taken and did not. If you realize you missed one, ask a tax professional about the correction steps before the year-end deadline passes again.

Timing, annuitizing and the QLAC

When does the first required distribution happen?

The first distribution is due by the year you reach the starting age, but you can delay it until April 1 of the following year. If you delay, you take two distributions in that second year, which can push you into a higher bracket. The decision is a tax question and belongs with a tax professional.

What changes if I turn the contract into income?

When a contract is annuitized, the insurer pays a stream, and payments that meet the rules count as the required distribution for that contract. This is also called annuitization. The payments must follow the rules on timing and amount, and the value of an annuitized contract generally leaves the balance used for your other IRAs. How these pieces fit together depends on your accounts, so ask the insurer and a tax professional to confirm the interplay before you annuitize.

Does a QLAC change anything?

A qualified longevity annuity contract is a special deferred income annuity bought with IRA money. Premiums up to a dollar limit ($210,000 in 2026, according to the guide on qualified longevity annuity contracts) are left out of the balance used to calculate required distributions, so the owner's yearly required amount is smaller until the QLAC payments begin, which must be by age 85. The post on How a QLAC changes required minimum distributions: a worked example works through an example.

Should I take the distribution from the annuity or from somewhere else?

There is no single right answer, and it depends on what each asset is doing for you. Taking money from the annuity reduces its value, which can reduce the death benefit and shrink a benefit base that is tied to the account value. Taking it from other IRA assets may mean selling investments at a time you would rather not. Points to weigh:

• The rider. If a rider is protected from required distributions, taking money from the annuity does no harm. If it is not, taking it elsewhere may be worth the cost.
• Liquidity. An annuity with a surrender schedule is the least flexible asset in the IRA. Drawing on more liquid assets first can keep options open, though the annuity's charges may already have expired.
• Taxes. Distributions from any traditional IRA are taxed the same way, so the choice rarely changes the tax in the current year. It can change the future, because what stays in the IRA is what remains taxable later and what heirs inherit.
• Simplicity. Automatic yearly or monthly withdrawals from one account are easy to manage and easy to audit.

A short example shows how the aggregation works. Say a 75-year-old has two traditional IRAs. IRA A is the annuity and was worth $300,000 on December 31. IRA B holds funds and was worth $200,000. The IRS Uniform Lifetime Table distribution period at age 75 is 24.6 years. The requirement for A is $300,000 divided by 24.6, or $12,195.12. For B it is $200,000 divided by 24.6, or $8,130.08. The total is $20,325.20, which is also $500,000 divided by 24.6. The owner may take all of it from IRA B, though B holds only $200,000 and so will shrink, or all from A, or any split. The total is what the IRS checks.

Questions to put to the insurer

If you hold or are considering an IRA annuity, ask the issuer these in writing:

1. What value will you report for required-distribution purposes, and does it include any feature beyond the account balance?
2. Will you calculate the required distribution each year, and by when?
3. Are required distributions exempt from surrender charges and market value adjustments?
4. Does a required distribution count as an excess withdrawal under the income rider, and is a form needed to protect it?
5. Does a required distribution before the income start date trigger the rider?
6. If I have other IRAs, can I satisfy the whole requirement from them without touching this contract?
7. What are the options for automatic yearly distributions, and how is withholding set?

An answer that leaves the rider's treatment of required distributions unclear is a reason to ask again. The state insurance department takes complaints if a company fails to answer clearly, and a tax professional can tell you how the answers fit your whole picture.

Key takeaways

• A required distribution is figured for the IRA owner on the prior year-end value, and an annuity inside the IRA is one of the assets in it; the owner carries the responsibility.
• The value used for an unannuitized annuity can exceed the account balance when the contract promises extra benefits, so ask the insurer what it reports.
• Traditional IRA amounts can be added together and taken from any one of them, which can keep a rider's guarantee untouched.
• Whether a required distribution counts as an excess withdrawal depends on the rider clause; the loss can be dollar for dollar or proportional.
• Missing a required distribution carries a 25 percent excise tax, or 10 percent if corrected in time, so the insurer's written answers are worth collecting early.