Authored by: Tom Kelley, MBA

The SECURE 2.0 Act, signed into law in December 2022, introduced significant updates to retirement planning rules, including changes to required minimum distributions (RMDs). These adjustments offer retirees more flexibility to manage their savings effectively while opening new opportunities for incorporating annuities into retirement plans. Among these, annuities stand out as powerful tools for addressing RMD requirements later in life.

Understanding how these provisions impact RMDs can help retirees and their families create a balanced strategy that maximizes income, minimizes taxes, and preserves financial stability.

What Are Required Minimum Distributions (RMDs)?

RMDs represent the minimum amounts individuals must withdraw from their tax-advantaged retirement accounts—such as IRAs and 401(k)s—starting at a specific age. These withdrawals ensure that tax-deferred assets are eventually distributed and taxed.

With the SECURE 2.0 Act, the RMD starting age increased:

• From 72 to 73 for individuals born between 1951 and 1959.
• To 75 for those born in 1960 or later.

This extended timeline allows retirees more time to grow their savings and plan strategically, particularly when incorporating annuities.

Qualified Annuities: Fixed, Index-Linked, and QLACs

Annuities offer retirees a predictable income stream and can satisfy RMD requirements in tax-efficient ways. While qualified longevity annuity contracts (QLACs) are often discussed in the context of SECURE 2.0, fixed and variable annuities also play a crucial role in shaping retirement income strategies.

Fixed or Index-Linked Annuities

These provide a guaranteed and consistent payout over a defined period or for life.

RMD Impact:
Fixed annuities can be structured to comply with RMD requirements, offering retirees predictable distributions that simplify cash flow management. Their stability makes them a reliable tool for covering essential expenses later in life.

There are some contracts available in the marketplace today structured with lower fees and the opportunity for increasing income over the annuitant’s lifetime.

Qualified Longevity Annuity Contracts (QLACs)

SECURE 2.0 increased the QLAC purchase limit to $200,000. These contracts defer income distributions, often until age 85.

RMD Impact:
Funds used to purchase QLACs are excluded from RMD calculations until payments begin, allowing for tax-deferred growth and potentially lowering taxable income in earlier retirement years.

Key SECURE 2.0 Changes Impacting Annuities

The SECURE 2.0 Act introduced several provisions that enhance the strategic use of annuities in retirement accounts, particularly in meeting RMD requirements.

Expanded QLAC Contribution Limits
Retirees can now allocate up to $200,000 to QLACs, enabling larger deferrals of taxable income while securing future income.

Partial Annuitization
Retirees can now split their retirement accounts, using one portion to fund an annuity while keeping the other portion in traditional investments. This approach allows flexibility in managing income and taxes.

Joint Life Expectancy for Spousal Benefits
Annuities that include a spouse can now use joint life expectancy to calculate RMDs, often reducing annual withdrawal requirements and preserving more funds for later years.

How Annuities Address RMD Challenges Later in Life

As retirees age, RMDs often increase, creating potential tax burdens and liquidity challenges. A partial allocation to annuities can mitigate these risks. Later in retirement, annuities can provide a dependable income stream that aligns with RMD requirements. They can help to reduce or eliminate the “sequence of returns” risk associated with the forced liquidation of marketable securities. Their predictable payouts simplify financial planning and help retirees meet essential expenses without depleting other assets at inopportune times.

Strategic Considerations for Retirees

While annuities provide valuable tools for meeting RMD requirements, integrating them into a retirement strategy requires careful planning. Key considerations include:

• Tax Efficiency: Annuities typically offer predictable payouts that align with RMD timelines, and depending on the contract, can allow for growth opportunities, creating a tailored strategy based on personal circumstances.
• Balancing Stability and Growth: Retirees can allocate partially to annuities to secure essential income while maintaining some exposure to market growth.
• Coordination With Legacy Goals: Annuities should align with broader estate planning objectives to ensure the smooth transfer of wealth to heirs.

How Granite Harbor Advisors Can Help

At Granite Harbor Advisors, we specialize in crafting customized retirement strategies that take full advantage of the SECURE 2.0 Act’s provisions. If you’re considering a partial allocation to annuities, our team can guide you through:

• Evaluating the suitability of annuities within your overall retirement plan.
• Optimizing RMD strategies to reduce taxes and preserve wealth.
• Coordinating annuities with other investment and estate planning goals.

Our expertise ensures that your financial plan provides stability, growth potential, and peace of mind.

Conclusion

The SECURE 2.0 Act has expanded the opportunities for retirees to use annuities to manage RMDs strategically. Traditional annuities and QLACs offer a range of solutions to ensure financial stability and tax efficiency throughout retirement.

If you’re ready to explore how these changes can enhance your retirement strategy, Granite Harbor Advisors is here to help. Contact us today for a personalized consultation.

References

For further details and official updates on the SECURE 2.0 Act and its implications on retirement savings plans, please refer to the following link: TSP Bulletin 24-2.