Category: Personal Finance

Required Minimum Distributions, commonly called RMDs, are mandatory annual withdrawals the IRS requires from most retirement accounts once you reach a certain age. Understanding how RMDs work is essential for retirement planning because they affect your tax situation, Social Security benefits, Medicare premiums, and estate plans. Here is a complete guide to RMDs in 2026.

What Is an RMD?

When you contribute to a traditional IRA, 401(k), 403(b), or similar pre-tax retirement account, you defer taxes on that money until you withdraw it. The IRS allows this tax deferral to encourage retirement savings — but it eventually requires you to start taking withdrawals so it can collect those deferred taxes. That mandatory annual withdrawal is the RMD.

The amount you must withdraw each year is calculated by dividing your account balance at the end of the prior year by a life expectancy factor from IRS actuarial tables. The older you are, the larger the percentage you must withdraw.

When Must You Start Taking RMDs?

Under the SECURE Act 2.0 (passed in 2022), the required beginning date for RMDs was updated:

• If you were born in 1951 or later, you must begin taking RMDs at age 73.
• If you were born in 1960 or later, the starting age increases to 75 (effective for those reaching 75 after January 1, 2033).

Your first RMD must be taken by April 1 of the year after you reach the applicable starting age. All subsequent RMDs must be taken by December 31 of each year. If you delay your first RMD to April 1, you will have two RMDs in that second year — one for the prior year (delayed first RMD) and one for the current year — which could push you into a higher tax bracket.

Which Accounts Are Subject to RMDs?

RMDs apply to:

• Traditional IRAs
• Rollover IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k) plans
• 403(b) plans
• 457(b) plans (for governmental employers)
• Profit-sharing plans
• Inherited IRAs (special rules apply — see below)

Roth IRAs are NOT subject to RMDs during the original owner’s lifetime. This is one of the major advantages of Roth accounts for people who want to preserve wealth for heirs or reduce required taxable distributions in retirement.

How Is the RMD Amount Calculated?

The basic formula is:

RMD = Prior December 31 account balance / Distribution period from IRS Uniform Lifetime Table

The IRS Uniform Lifetime Table assigns a distribution period based on your age. In 2022, the IRS updated these tables to reflect longer life expectancies, which effectively reduced RMDs slightly for most people.

Example: You turn 75 in 2026. Your traditional IRA balance on December 31, 2025 was $500,000. The IRS distribution period for age 75 is 24.6 years.

$500,000 / 24.6 = $20,325 — that is your 2026 RMD.

If your sole beneficiary is a spouse who is more than 10 years younger than you, you use the Joint Life and Last Survivor Expectancy Table instead, which produces lower RMDs.

If you have multiple IRAs, you calculate the RMD separately for each account but can take the total from any one or combination of your IRAs. For 401(k) plans, each plan’s RMD must be taken from that specific plan — you cannot aggregate across different 401(k) accounts.

Tax Treatment of RMDs

RMDs from pre-tax accounts are included in your gross income as ordinary income in the year taken. They are taxed at your ordinary income tax rate — the same rate as wages or salary. This can have several downstream effects:

• Higher tax bracket: RMDs can push you into a higher marginal tax bracket, especially if combined with other income.
• Social Security taxation: Up to 85% of Social Security benefits can be taxed if your combined income (including RMDs) exceeds certain thresholds.
• Medicare IRMAA surcharges: RMDs that push your MAGI above Medicare IRMAA thresholds will increase your Medicare Part B and Part D premiums the following year. In 2026, IRMAA surcharges can add hundreds of dollars per month to Medicare costs for high-income retirees.

What Happens If You Miss an RMD?

The penalty for failing to take a required RMD was historically 50% of the amount not taken. The SECURE Act 2.0 reduced this penalty to 25% — and further reduced it to 10% if you correct the mistake within a two-year correction window. While lower than before, the penalty is still significant. Always take your full RMD by the deadline.

Strategies to Manage RMDs

Roth Conversions Before RMDs Begin

One of the most effective strategies to reduce future RMDs is to convert pre-tax traditional IRA or 401(k) money to a Roth IRA before your RMDs begin. Roth IRAs are not subject to RMDs, so each dollar converted reduces your future mandatory withdrawal base and its associated tax.

Qualified Charitable Distributions (QCDs)

If you are 70½ or older and charitably inclined, a Qualified Charitable Distribution allows you to transfer up to $105,000 per year (2026 limit, indexed for inflation) directly from your IRA to a qualified charity. The QCD counts as your RMD but is excluded from your taxable income — unlike a regular IRA withdrawal followed by a charitable deduction. This is particularly valuable because it reduces your MAGI without requiring you to itemize deductions.

Work Longer

If you are still working for your current employer at age 73 (and do not own more than 5% of the company), you may be able to delay RMDs from your current employer’s 401(k) until you retire. This does not apply to IRAs or former employer 401(k)s.

Spend RMDs Strategically

RMDs taken but not needed for living expenses can be reinvested in a taxable brokerage account. While you cannot put them back into an IRA (unless you are still eligible to contribute), you can use them to continue building wealth in a taxable account that will receive a step-up in cost basis at death.

RMDs for Inherited IRAs

The SECURE Act changed the rules for inherited IRAs significantly. For most non-spouse beneficiaries who inherited after January 1, 2020:

• They must withdraw the entire inherited IRA within 10 years of the original owner’s death.
• There are no annual RMD requirements within the 10-year window (for accounts inherited from owners who had not yet begun RMDs) — just a full withdrawal by December 31 of the 10th year after death.
• Eligible Designated Beneficiaries (surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the deceased) have more flexibility and may stretch distributions over their lifetime.

Note: IRS guidance on the 10-year rule has been complex and evolving. Consult a financial advisor or tax professional for guidance specific to your inherited account situation.

RMDs and Estate Planning

Large pre-tax retirement accounts can create significant tax burdens for heirs under the 10-year rule. Strategies to consider:

• Convert pre-tax IRAs to Roth IRAs during your lifetime to reduce the tax burden on heirs.
• Leave Roth IRAs to heirs (tax-free withdrawals) and use pre-tax accounts for charitable giving through QCDs.
• Name a charity as beneficiary of pre-tax accounts — charities do not pay income tax on inherited IRAs.

Final Thoughts

RMDs are one of the most important considerations in retirement planning, yet many people do not plan for them until they are already required. Starting to think about RMDs in your 50s and 60s — while you still have time to use Roth conversions, QCDs, and asset location strategies — can meaningfully reduce the tax impact in retirement. Consult a financial planner or CPA to model how RMDs will interact with your other income sources and develop a withdrawal strategy that minimizes your lifetime tax burden.

Annuities are insurance contracts that promise a stream of income, typically for retirement. They are among the most commonly sold — and most frequently misunderstood — financial products in America. Some annuities are excellent tools for specific situations. Others come with high fees and complex terms that often benefit the insurance company more than the buyer. This guide gives you a complete, balanced picture so you can decide whether an annuity belongs in your financial plan.

What Is an Annuity?

An annuity is a contract between you and an insurance company. You give the insurer a lump sum (or a series of payments), and in exchange, the insurer promises to pay you a stream of income at a future date, either for a set period or for the rest of your life.

The defining feature of an annuity is the ability to guarantee lifetime income — a hedge against outliving your money. This is the core value proposition and the main reason annuities exist.

Types of Annuities

Fixed Annuities

A fixed annuity pays a guaranteed interest rate during the accumulation phase and provides guaranteed income payments during the payout phase. The insurance company bears all the investment risk. Fixed annuities are relatively simple, low-cost, and transparent compared to other types.

A variant called a Multi-Year Guaranteed Annuity (MYGA) is essentially a fixed annuity with a guaranteed rate for a specific term (similar to a CD). MYGAs can be competitive with bank CDs for conservative savers seeking predictable returns.

Variable Annuities

A variable annuity invests your premium in sub-accounts — essentially mutual funds — and your account value fluctuates with market performance. The appeal is growth potential from market participation. The concern is the layering of fees: a base mortality and expense (M&E) charge, an administrative fee, individual fund expenses, and often additional rider fees. Total costs on variable annuities can run 2-4% per year, significantly eroding returns compared to low-cost index fund investing.

Fixed Indexed Annuities (FIAs)

Fixed indexed annuities link your return to the performance of a market index (typically the S&P 500) but with a floor that protects your principal from losses. If the index goes up, you receive a portion of the gain up to a “cap rate” (for example, 8%). If the index goes down, you receive 0% — not a loss. This sounds attractive but comes with significant limitations: caps limit upside, participation rates often apply (you might only get 60% of the index gain), and fees can be high, especially with added riders.

Immediate Annuities (SPIAs)

A Single Premium Immediate Annuity (SPIA) converts a lump sum into an immediate income stream. You hand over your money and immediately begin receiving monthly payments. The payment amount depends on your age, the lump sum, prevailing interest rates, and the payout option selected (life only, joint life, period certain, etc.). SPIAs are the simplest and most straightforward annuity product. There are no accumulation fees — you just get income.

Deferred Income Annuities (DIAs / Longevity Annuities)

A deferred income annuity, also called a longevity annuity, is funded today but does not start paying out until a specified future date — often age 80 or 85. The long deferral period means you can turn a relatively small premium into a very substantial future income. These work well as longevity insurance for those worried about running out of money in extreme old age.

Accumulation Phase vs Payout Phase

Annuities have two phases:

• Accumulation phase: your money grows inside the contract, tax-deferred.
• Payout (annuitization) phase: you begin receiving income payments.

Many people purchase deferred annuities (variable or fixed indexed) intending to access the income riders or annuitize later, but the majority never actually annuitize. They end up paying high fees for a product they use primarily as a tax-deferred savings vehicle — which could be replicated more cheaply with an IRA or 401(k).

Riders: Optional Features That Add Cost

Insurance companies sell riders — optional benefits that can be added to an annuity for additional fees. Common riders include:

• Guaranteed Minimum Withdrawal Benefit (GMWB): allows you to withdraw a guaranteed percentage of a benefit base each year, even if the account value goes to zero.
• Guaranteed Lifetime Withdrawal Benefit (GLWB): similar to GMWB but guarantees payments for your entire life.
• Death benefit riders: guarantee your beneficiaries receive at least the original premium if you die before annuitizing.

Riders can add 0.5% to 1.5% per year in additional fees. Always calculate the total annual cost including all riders before purchasing a deferred annuity.

Tax Treatment of Annuities

Non-qualified annuities (funded with after-tax money) grow tax-deferred. When you withdraw money, earnings come out first and are taxed as ordinary income — not at the lower capital gains rate. Withdrawals before age 59½ are subject to a 10% early withdrawal penalty on the earnings portion.

Qualified annuities (held inside an IRA or 401(k)) follow the standard rules for that account type. All distributions are ordinary income.

The ordinary income treatment of annuity gains is a disadvantage compared to taxable brokerage accounts, where long-term capital gains rates apply to investment growth.

Surrender Charges

Most deferred annuities carry surrender charges — penalties for withdrawing more than a allowed amount (typically 10% per year free withdrawal) within the first 5 to 10 years of the contract. Surrender charge schedules might start at 7-8% and decline to zero over the surrender period. This locks up your money and creates significant liquidity risk. Never invest money in an annuity that you might need access to in the near term.

When Annuities Make Sense

• You have maxed all other retirement accounts (401(k), IRA, HSA) and want additional tax-deferred growth. In this case, a low-cost variable annuity or MYGA might make sense as an overflow vehicle.
• You want guaranteed lifetime income and have a defined pension-like income gap to fill. A SPIA or DIA can provide reliable income you cannot outlive.
• You are in poor health and worried about longevity risk. Actually, if you are in poor health, an annuity may not be the right choice — the insurance pricing assumes average life expectancy. Consult an advisor.
• You have trouble spending down assets in retirement. Some retirees are psychologically comforted by guaranteed income and will spend more freely when they know a fixed amount arrives every month.

When Annuities Are the Wrong Choice

• You have not maxed your IRA and 401(k) first (get the tax-advantaged space first).
• You are buying a variable or indexed annuity primarily for investment returns — the fees will likely erode those returns vs. low-cost index funds.
• You need liquidity — surrender charges make annuities poor choices for money you might need.
• You are being pressured by an insurance agent earning a high commission — typical annuity commissions range from 3% to 8%.

Low-Cost Annuity Alternatives

If you want a guaranteed income stream, a SPIA purchased from a highly-rated insurer at competitive rates through a fee-only advisor or direct-to-consumer platforms (Fidelity, TIAA, Blueprint Income) can be a good value at the right age. Avoid complex variable and indexed products with thick riders unless you have a fee-only advisor who can verify the math works in your favor.

Final Thoughts

Annuities are not inherently good or bad — they are a product that fits some situations well and others poorly. The simple version: if you want guaranteed lifetime income and are willing to give up control of a lump sum, a SPIA is a clean, transparent solution. If you are being offered a complex variable or indexed annuity loaded with riders, get independent analysis before signing. Always ask what the all-in annual cost is, what the surrender period is, and whether you could achieve similar outcomes at lower cost through other means.