Retirement planning often comes with two big headaches: required minimum distributions
(RMDs) and the tax burden they bring. But with the right strategy — especially using annuities
— you can greatly reduce or even avoid some of those pains. In this post, we’ll walk through
how annuities can be used to manage RMDs, lower taxable income, and make your retirement
savings work smarter.
What Are RMDs — and Why They Can Be a Problem
● RMDs are mandatory annual withdrawals from traditional IRAs, 401(k)s, and other tax-deferred retirement accounts once you reach a certain age (under current law, age 73)
● The IRS decides the minimum withdrawal for each year based on your account balance and life expectancy.
● Withdrawals count as ordinary income, which can increase your taxable income and potentially push you into a higher tax bracket.
● For many retirees — especially those with large account balances — RMDs can create a substantial tax burden every year.
Given that, it’s no wonder many retirees look for ways to manage or soften the RMD impact. One of the ways to do that is by using annuities strategically.
How Annuities — Especially Deferred Income Annuities can Help
Qualified Longevity Annuity Contract (QLAC)
● A QLAC is a special type of deferred-income annuity that you can buy with funds from a qualified retirement account (like an IRA or 401(k)).
● The big benefit: the money you use to purchase a QLAC is removed from your retirement account balance for the purposes of calculating RMDs.
● Because of that, your RMDs can be significantly reduced. That in turn lowers the amount
of taxable income you realize each year — which may help you stay in a lower tax bracket or reduce tax on Social Security benefits, Medicare premiums, or other retirement income.
● The income from a QLAC doesn’t have to start right away. In many cases, you can defer payments until later (age 75–85, depending on the contract), giving the remaining assets in your retirement account more time to grow tax-deferred.
Other Annuities: Income Annuities or Fixed/Variable Annuities
● If you purchase an income annuity (or convert part of your retirement account into an
annuity), the regular payments can count toward satisfying your RMDs — which might mean you don’t need to liquidate other assets.
● By aligning annuity payments with your RMD obligations, you can create a predictable, steady income stream while reducing the risk of large, taxable lump-sum withdrawals.
What This Can Do for Taxes and Retirement Income
● Lower taxable income in early retirement years — By removing a portion of your retirement account from RMD calculations (via a QLAC), you postpone future taxable income. This gives you a chance to stay in a lower tax bracket longer.
● More flexibility and predictability — Rather than having to take money out only because of RMD rules (even if you don’t need the cash), an annuity lets you plan a monthly or annual income stream that fits your needs.
● Longer tax-deferred growth — Money you’ve placed in an annuity isn’t subject to RMDs (until the annuity starts paying), which means it has more time to grow.
● Potential to minimize withdrawals from other accounts — If your annuity payments satisfy RMD rules, you may avoid selling investments or cashing in other accounts — which can be better for long-term financial health and may reduce future tax burdens.
Important Caveats & Things to Watch Out For
● Not all annuities automatically solve RMD issues. A key detail is whether the annuity is funded with qualified (pre-tax) money and whether it qualifies as a QLAC or suitable income annuity.
● Even with a QLAC, there are limits. For example, IRS rules cap how much of your retirement account you can convert into a QLAC.
● Delaying distributions — while tempting — means you’ll still face future withdrawals. If you wait too long or take large distributions later, you may end up with a bigger tax bill down the road.
● Annuities come with trade-offs: less liquidity, potential fees, and the need to trust the insurance company’s solvency. Annuities also tend to be more complex than typical retirement account investments.
● Because tax laws and personal circumstances vary widely, using annuities effectively usually requires careful planning — and often a conversation with a financial or tax advisor.
Is an Annuity Strategy Right for You?
Using annuities — especially deferred-income ones like QLACs — can be a powerful tool to manage RMDs and reduce taxes in retirement. But it’s not a one-size-fits-all solution.
If you:
● Expect to have a large balance in your retirement accounts,
● Want to avoid big taxable withdrawals in your early retirement years,
● Value predictable income over having flexible access to cash,
Then annuities might be a good fit.
On the other hand, if you anticipate needing flexibility to access large sums of money (for medical expenses, travel, helping family, etc.), or if you dislike committing to long-term contracts
— then you’ll want to weigh the benefits against the downsides carefully.
Final Thoughts
In a world where retirement looks very different than it did a generation ago, retirees need flexible, tax-smart strategies. Annuities – when used thoughtfully, offer a compelling way to
tame the burden of RMDs, delay taxes, and build a reliable income stream that can last decades.
Before you decide, make sure you understand the fine print, consider the trade-offs, and ideally talk with a financial advisor. With planning and foresight, annuities may help turn a retirement liability into a retirement asset.
