28 Feb Can I take my RMDs from annuities all from one account?

Q. I have a question about annuities. I have two right now. Let’s call them A and B. I don’t like B but I’m locked into it for a few more years. I can take out (roll over) about $38,000 right now without penalty. So I’m thinking of starting C with the rollover in a plan that pays 4.7% but I can’t withdraw anything for five years. I’m 69 now and I will have to start taking required withdrawals at 73 in four years. My question is when I start taking the mandated withdrawals at 73, does it have to be out of A, B, and C or can I just take the required amount out of one or two? Say the total amount I have to take per year is $24,000. Would I have to take equal amounts out of each one or can I just take the $24,000 out of one?
— Retired and stumped

A. We’re glad you want to make sure you’re handling the distributions correctly.

The answer to your question depends on what type of accounts you own these annuities in.

When you own an annuity that was purchased with funds not in a retirement account, it is called a non-qualified annuity, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

You’re not required to take any distributions from non-qualified annuities, regardless of your age, he said.

However, because you mentioned Required Minimum Distributions (RMDs) starting at age 73, we’re going to assume that all your annuities are all owned within an IRA or 401(k) k plan.

These are called qualified annuities, and when owned within an IRA or 401(k) they are subject to the same RMD rules for qualified plans, DeFelice said.

If you have multiple IRAs, you must calculate the appropriate RMD for each one. However, the total distribution amount can be taken from one or more IRAs to satisfy the distribution as long as the total RMD amount is withdrawn, he said.

“For example, in your case where you have three different IRAs, you can take the entire RMD amount from just one account,” he said. “The underlying investments don’t matter – it could be stocks, bonds, mutual funds or annuities.”

However, when annuities are owned within an IRA, you want to make sure that you do not go over the maximum withdrawal allowed from the underlying annuity contract or you could be subject to penalties and/or surrender charges, DeFelice said, adding that most annuity contracts allow you to withdraw up to 10% of the contract value without incurring any surrender charges.

The rules are different for employer-sponsored defined contribution plans, like 401(k)s and 403(b)s, he said.

The 403(b) plan rules mirror IRA rules in that the total distribution from multiple 403(b) plans can be taken from one or more of the 403(b) accounts, he said. However, the rule works differently with 401(k) accounts. If you have multiple 401(k) accounts from prior jobs, you must take the appropriate RMD amount from each 401(k) account you have, he said.

For that reason, DeFelice said he usually recommends clients review their overall retirement account structure prior to hitting RMD age (currently age 73) and consolidate the number of accounts when possible. This will not only make your retirement finances easier to manage, but it will give you more flexibility when developing a distribution strategy, he said.

For example, he said you can have income-producing assets like annuities in one IRA, such that the income is enough to satisfy your total RMD, and then have another IRA invested more for growth that you won’t have to touch in years like 2022 when everything across the board was down.

“It is important to realize that you’ll need to have some growth allocation when planning for a 25- or 30-year retirement without a traditional paycheck,” he said. “Just money markets, CD’s and treasury bonds won’t cut it for most folks, even at today’s higher interest rates.”

Once you are retired, balancing an appropriate mix of growth and safety is crucial to successful distribution planning, and how and where you take your RMDs can play a big role in getting that right, he said. It can help to maximize the longevity of your assets, he said.

“I always tell clients that while you are in the accumulation phase – i.e. working, earning income, paying your bills and your mortgage, raising a family, saving for the future, etc. – financially this is actually the easy part, even though it doesn’t feel like it at the time when you are in it,” he said. “Once you retire and enter the distribution phase, it becomes exponentially more complicated. There are lots of pitfalls that could prove very costly, and once you are retired you have less time to recover from financial mistakes.”

He recommends you sit down with a certified financial planner with experience in retirement income planning to craft a distribution strategy that makes sense for you.

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This story was originally published in February 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.