New Law Could Reduce RMD Rules for Annuitized Annuities - But Proper Valuation is Needed
Recent changes under the SECURE 2.0 Act may significantly reduce required minimum distributions (RMDs) for individuals holding annuitized IRA annuities. The new provision allows the RMDs from these annuities to be aggregated with RMDs from non-annuitized IRA funds. This option could ease distribution burdens and lower taxable income for many retirees—but only if the annuity provider delivers a proper year-end valuation.
This change reflects a shift in how the IRS allows individuals to calculate total RMDs across their retirement accounts. But while the rule offers new flexibility, it introduces a new layer of complexity around valuation requirements that must be met to use it correctly.
How RMDs Work for Annuitized IRA Annuities vs. Other IRA Funds
Annuities inside IRAs follow different RMD calculation rules than other IRA assets like mutual funds or ETFs. Once an IRA annuity has been annuitized, the annual payments received automatically count as that account’s RMD. In contrast, other IRA funds use a formula: the December 31 account balance from the prior year is divided by a life expectancy factor from IRS tables.
Previously, these two types of accounts—annuitized IRAs and non-annuitized IRAs—had to calculate and satisfy their RMDs separately. Even if annuity payments exceeded what would normally be required, those excess amounts could not be applied to other IRA RMDs.
Now, SECURE 2.0 changes that. The updated rule allows individuals to combine annuitized and non-annuitized IRA assets into a single calculation. This could lead to a lower total RMD requirement when compared to calculating each one separately.
An Illustrative Example
Consider Chloe, who turns 73 in 2024 and must take an RMD. Late in 2023, she used $300,000 from IRA-A to purchase an annuity that began paying her $1,500 per month starting in January 2024. Separately, she also owns IRA-B, which holds $200,000 in mutual funds.
Under the old rules, Chloe would receive $18,000 in payments from her annuitized IRA-A, and she would still be required to withdraw an additional $7,547.17 from IRA-B. Her total RMD for the year would come to $25,547.17.
Under the new SECURE 2.0 aggregation rule, if Chloe’s annuity is properly valued at $300,000 as of December 31, 2023, her total IRA value becomes $500,000. Dividing that by her life expectancy factor of 26.5 results in a total RMD of $18,867.92 for 2024. Since $18,000 is already being paid from the annuity, she only needs to withdraw $867.92 from IRA-B.
This reduces her total RMD by almost $6,700 compared to the previous rule.
Why Proper Valuation Is Critical
The ability to use the new aggregation method hinges on accurately determining the fair market value of the annuitized IRA as of the prior December 31. Without this number, the standard RMD formula cannot be applied, and the benefits of the rule cannot be realized.
Annuity providers are supposed to report year-end values annually using IRS Form 5498. However, once annuities become annuitized—meaning they begin paying a stream of income—it’s common for insurance companies to stop reporting these valuations altogether.
The IRS has not yet provided guidance on alternative methods for valuation when Form 5498 does not reflect the required figure. Until further clarification is issued, IRA owners must rely on their annuity provider to deliver a correct and timely valuation.
Risks of Moving Forward Without Proper Valuation
Attempting to use the aggregation method without a valid valuation may cause compliance issues. If the IRS determines that the annuity's value was not accurately reported or calculated, an individual may fall short of their required distribution for the year. That could trigger excise taxes on the shortfall and add layers of corrective paperwork later.
Even if a valuation is available, advisors and clients should review it carefully. It must represent a fair market estimate, reflect the correct reporting date, and align with the assumptions used to calculate life expectancy-based RMDs.
What This Means for IRA Owners with Annuities
For those who hold annuitized IRA annuities, this rule change opens the door to more strategic RMD planning. It could especially benefit individuals with high annual annuity payments who would otherwise have to take large, additional distributions from other IRA accounts.
However, it’s important not to assume eligibility without verifying the annuity’s value. If your provider cannot deliver the required data, it may be safer to continue following the previous RMD calculation method until the IRS offers more direction.
Those considering a future IRA annuity purchase should also keep valuation needs in mind. Working with an insurer that provides full reporting—even after annuitization—can help ensure access to the benefits introduced under SECURE 2.0.
In Summary
The SECURE 2.0 update allowing RMD aggregation across annuitized and non-annuitized IRAs offers a clear tax advantage—but it comes with a catch. Without an accurate valuation of the annuitized IRA on December 31 of the previous year, the entire strategy could fall apart.
Before relying on this new rule, IRA owners must work with their annuity provider to confirm that the appropriate valuation will be provided on time and in the correct format. Until the IRS provides further guidance, conservative implementation and close collaboration with a retirement advisor are essential.
At California Retirement Advisors, we help clients evaluate the pros and cons of strategies like these and coordinate with annuity providers to ensure accurate documentation. If you hold an IRA annuity or are considering one, let’s discuss how the new rule might apply to you—and how to protect yourself from missteps.
FAQ: SECURE 2.0 and IRA Annuity RMD Aggregation
Can I now combine RMDs from my annuitized IRA and other IRA accounts?
Yes, SECURE 2.0 allows aggregation, but only if your annuity's prior-year value is properly documented.
What if my annuity provider doesn't provide a 12/31 valuation?
Without a valuation, you may not be able to use the new aggregation rule. It's best to confirm reporting practices with your provider.
How does the new method calculate total RMDs?
The combined value of all IRAs—including annuitized ones—is divided by your life expectancy factor. Annuity payments then offset that amount.
Does this change apply to non-annuitized annuities?
No. This rule only applies once the annuity inside the IRA is annuitized and producing regular payments.
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.