Fixed Index Annuities and Required Minimum Distributions: What You Need to Know

Slug: fixed-index-annuities-and-required-minimum-distributions-what-you-need-to-know Target Audience: Retirees 70½+ with IRAs, financial planners, pre-retirees planning RMD strategy Target Keywords: fixed index annuity RMD, FIA required minimum distribution, QLAC RMD strategy 2026, annuity inside IRA RMD rules, how to reduce RMDs

If you own a Fixed Index Annuity (FIA) inside an IRA — or you’re considering purchasing one — the question of Required Minimum Distributions deserves a clear, honest answer before you sign anything.

The interaction between FIAs and RMDs confuses even experienced investors. Income riders create a gap between the “income base” and the actual contract value. QLACs offer a powerful deferral tool that most people have never heard of. And non-qualified annuities sidestep the RMD issue entirely — but come with their own tax considerations.

This article walks through all of it, without the jargon, with real dollar examples. By the end, you’ll understand exactly how your annuity is affected by RMD rules — and what your options are.

What Are RMDs and Why Do They Matter?

The IRS does not allow tax-deferred retirement money to grow untouched forever. Once you reach age 73 — or age 75 if you were born in 1960 or later, per the SECURE 2.0 Act — you must begin taking Required Minimum Distributions (RMDs) from every traditional IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b), and similar tax-deferred account you own.

How RMDs Are Calculated

Your RMD for a given year is calculated using a straightforward formula:

RMD = December 31 prior-year account balance ÷ IRS Distribution Period

The IRS assigns a “distribution period” to each age based on the Uniform Lifetime Table. At age 73, that factor is 26.5. It shrinks each year, meaning a larger percentage of your account must be withdrawn annually as you age.

Example: Margaret turns 73 in 2026. Her traditional IRA had a balance of $500,000 on December 31, 2025.

$500,000 ÷ 26.5 = $18,868 RMD for 2026

If Margaret fails to take that $18,868, the IRS imposes a 25% excise tax on the shortfall — that’s a $4,717 penalty on money she was simply trying to leave alone. (The penalty drops to 10% if corrected within two years, but it’s a painful and avoidable mistake.)

Why RMDs Can Create Problems

For retirees who don’t need the income, RMDs force taxable withdrawals that can:

Push you into a higher income tax bracket
Trigger IRMAA surcharges that increase your Medicare Part B and Part D premiums
Reduce the tax-deferred compounding you were counting on

This is why RMD strategy — not just RMD compliance — matters.

FIAs Inside an IRA: Subject to RMDs, With One Important Complication

A Fixed Index Annuity held inside a traditional IRA is a qualified annuity. It receives the same tax-deferred treatment as any other IRA investment. And like any other IRA investment, it is fully subject to RMD rules once you reach the required beginning date.

This is not optional, and it is not avoidable simply because the money is inside an annuity contract. The IRS sees the IRA wrapper — not the annuity — as the controlling factor.

The Income Rider Confusion: Contract Value vs. Income Base

Here’s where things get genuinely confusing for many FIA owners, and where mistakes happen.

Many FIAs include an income rider — a feature that provides a guaranteed income benefit, often with a separate “income base” that grows at a fixed rate (commonly 6–8% per year) regardless of market performance. This income base is used to calculate your future guaranteed income payments.

The income base is not the same as your contract value.

For RMD purposes, the IRS uses your actual contract value — not the income base — to calculate what you must withdraw.

Example: Robert, age 74, owns a FIA inside his IRA. His contract has:

Contract value (actual account value): $280,000
Income base (rider value): $420,000

His RMD is calculated on $280,000, not $420,000.

$280,000 ÷ 25.5 = $10,980 RMD for the year

This distinction matters because some clients — and even some advisors — mistakenly believe the inflated income base is what drives the RMD calculation. It does not. But it does mean that if Robert’s income rider is paying him $25,000/year in guaranteed income, that payment easily satisfies his RMD and then some.

When the Annuity Payment Satisfies the RMD

If you’ve annuitized your contract or activated your income rider and are receiving periodic payments, those payments count toward satisfying your RMD for that account. In many cases, the guaranteed income stream from a FIA will exceed the RMD requirement — making compliance automatic.

QLACs: The Powerful RMD Deferral Tool Most Retirees Have Never Heard Of

A Qualified Longevity Annuity Contract (QLAC) is a specialized type of deferred income annuity that allows you to carve out a portion of your IRA, defer income until as late as age 85, and — critically — exclude that premium amount from your RMD calculation until payouts begin.

2026 QLAC Rules

Maximum contribution: $210,000 per person (inflation-adjusted for 2026 under SECURE 2.0)
The 25% rule: Repealed by SECURE 2.0 — the flat dollar limit is the only cap
Latest income start date: Age 85
RMD exclusion: The QLAC premium is removed from your IRA balance for RMD purposes until distributions begin

How Much Can a QLAC Save in RMDs?

Example: Patricia is 70 years old with a $700,000 IRA. She’s concerned about rising RMDs as her account grows and wants to reduce her future tax burden.

She purchases a $210,000 QLAC, deferring income to age 85.

When she turns 73 and RMDs begin, her IRA balance for RMD calculation purposes is:

$700,000 (account value) − $210,000 (QLAC premium excluded) = $490,000 taxable base

Without the QLAC:

$700,000 ÷ 26.5 = $26,415 RMD

With the QLAC:

$490,000 ÷ 26.5 = $18,491 RMD

Patricia reduces her first-year RMD by nearly $8,000 — and that difference compounds over time as her IRA continues to grow. At age 85, her QLAC turns on, providing a guaranteed income stream for life, regardless of how long she lives.

This is a particularly powerful strategy for retirees who don’t need the income now but want protection against longevity risk and a smaller tax bill in their 70s.

Non-Qualified FIAs: The RMD-Free Alternative

If an FIA is purchased with after-tax money — outside of any IRA, 401(k), or other qualified account — it is a non-qualified annuity. Non-qualified annuities are not subject to RMD rules. Period.

The tradeoff: while the premium goes in with after-tax dollars (no upfront deduction), the gains grow tax-deferred. When you take withdrawals, only the earnings portion is taxable — your original premium comes back to you tax-free.

For retirees who have already maxed out tax-deferred accounts, have significant non-IRA savings, or simply want a portion of their retirement assets free from the RMD clock, a non-qualified FIA can be an elegant solution.

Example: David, age 68, has $400,000 in a taxable brokerage account. He’s already managing RMDs from his IRA and doesn’t want to add another account to the equation. He repositions $200,000 into a non-qualified FIA. That money now grows with downside protection, earns index-linked interest, and will never trigger an RMD — regardless of how long he waits to access it.

Annuitization vs. Systematic Withdrawals: Which Satisfies Your RMD?

When it comes to satisfying RMDs from a qualified FIA, you have two primary paths:

Annuitization

When you annuitize a qualified annuity, you convert the contract value into a guaranteed stream of periodic payments. Once annuitized, the IRS treats the account as satisfying RMD requirements through those payments — provided the payment schedule meets certain actuarial standards. This is a permanent, irrevocable decision.

Advantage: Automatic RMD compliance. Guaranteed income for life. Disadvantage: You lose access to the lump-sum contract value. No flexibility if your needs change.

Systematic Withdrawals

Most FIA owners satisfy RMDs through systematic withdrawals — periodic distributions from the contract value, calculated annually based on the IRS formula. This preserves flexibility and keeps the income base intact for future guaranteed income calculations.

Advantage: Flexibility. The income base continues to grow. You can adjust distributions as needed. Disadvantage: Requires annual calculation and active management. Withdrawal charges may apply if the contract is still in a surrender period.

For most FIA owners, systematic withdrawals are the preferred approach — particularly while the income rider is still accumulating. Your advisor should calculate your annual RMD requirement and coordinate withdrawals accordingly.

How Working With a Fiduciary Advisor Protects You

The FIA and RMD landscape is genuinely complex. The wrong strategy — purchasing a QLAC in the wrong account type, miscalculating RMDs on a contract with an income rider, or annuitizing prematurely — can result in unnecessary taxes, IRS penalties, or loss of flexibility you’ll regret later.

A fiduciary advisor is legally required to act in your best interest, not in the interest of a commission. When it comes to annuities and RMD strategy, that distinction matters enormously. The right advisor will:

Model your projected RMDs across all accounts over a 10–20 year horizon
Identify whether a QLAC makes sense given your IRA balance, age, and income needs
Determine whether a qualified or non-qualified FIA is more appropriate for your situation
Coordinate annuity withdrawals with Social Security, pension income, and other taxable sources to minimize your overall tax burden
Review your FIA contract terms — surrender schedule, income rider mechanics, cap rates — before you commit

At Legacy Wealth Services, we work with a wide portfolio of FIA carriers and take a planning-first approach to every client conversation. We don’t sell products. We build strategies — and then find the products that fit.

The Bottom Line

Fixed Index Annuities can be a powerful component of a retirement income plan. But inside an IRA, they come with RMD obligations that must be managed carefully. The income base confusion alone causes costly mistakes every year. And the QLAC — one of the most underutilized tools in retirement planning — can meaningfully reduce your tax burden if implemented correctly.

The good news: none of this is beyond reach with the right guidance.

Ready to see how a Fixed Index Annuity fits into your retirement income plan — and how to handle RMDs the right way?

This article is for educational purposes only and does not constitute tax, legal, or investment advice. RMD rules and QLAC limits are based on IRS guidance current as of 2026. Consult a qualified tax professional and licensed financial advisor for guidance specific to your situation.

Legacy Wealth Services | Rodney Cummings | OR License #18847712 | 503-832-8555 | contact@legacywealthservices.com