Are variable annuities subject to required minimum distribution (RMD)?

Variable annuities are insurance contracts that provide tax-deferred growth of assets that can later generate a guaranteed income stream, thus making them popular vehicles for financing retirement. Like other investment products, variable annuities can be held as either qualified or non-qualified for tax purposes.

Qualified contracts – those held in IRAs or other tax-advantaged plans – are subject to the same required minimum distribution (RMD) rules as other investments in qualified retirement plans. Non-qualified contracts offer tax-deferred growth of after-tax funds and have no required withdrawals until annuitization, as defined by the annuity's contract.

The Internal Revenue Service (IRS) requires owners of IRAs and other qualified retirement accounts to begin taking withdrawals once they reach the age of 70½. The amount of this RMD is determined by an age-based divisor and the balance in the account. A hefty penalty of 50% is imposed if the minimum is not withdrawn each year.

Having to take withdrawals can create fear for retirees, as life expectancies lengthen and the possibility of outliving retirement savings increases. The guaranteed lifetime income rider available for purchase on some variable annuity policies can help solve this problem.

Distributions can negatively impact investment performance and sometimes other benefits to the annuity contract, such as lifetime income riders and death benefits. When evaluating a variable annuity for qualified monies, it is very important to understand how RMDs are treated and the effect they have on the policy.

For example, MetLife offers its Guaranteed Minimum Income Benefit Plus rider on qualified contracts. As of 2018, this benefit treats RMDs as a percentage withdrawal against the guaranteed income base and not the total account value. This helps to maintain the investment's ability to grow.

Required distributions should not stop investors from considering the valuable benefits offered by variable annuities. Investors and financial planners should work together to find a contract that works well with RMDs to maximize investment growth to last through retirement.