I have two tax-deferred annuities. They’re traditional non-qualified annuities, purchased with a single deposit. Do I have to take required minimum distributions (RMDs) from them at age 70 12?

No. “Qualified” and “nonqualified” annuities are both subject to a 10 percent early withdrawal penalty on distributions taken before age 59 1⁄2. But only qualified annuities are subject to the RMD rules.

Qualified annuities are those purchased with IRA money, or in an employer-sponsored retirement plan. As retirement accounts, they’re subject to the RMD rules. Nonqualified annuities, bought with after-tax dollars, are not.

This doesn’t mean you’ll never have to take withdrawals from a nonqualified, however. Insurance companies typically require you to “annuitize” a nonqualified annuity at a specific point — say, at age 85. When you “annuitize,” you turn your annuity into a stream of monthly payments. Part of each annuitized payment is a tax-free return of your original investment, and part is the annuity’s earnings, which are taxable at ordinary income tax rates. The insurance company will tell you what percentage of each payment is taxable.

But what if you tap a deferred annuity before you annuitize it? In that case, the tax rules are different. If you bought your annuity after Aug. 14, 1982, your pre-annuitization withdrawals are taxable until all your earnings are withdrawn. Let’s say you bought a deferred annuity for $100,000 and it’s now worth $115,000, for example. If you withdrew $10,000, the entire distribution would be taxable. If you withdrew $18,000, $15,000 would be taxable and $3,000 would be treated as a tax-free return of your principal.

Annuities purchased before Aug. 14, 1982, are subject to an earlier tax rule, which let you withdraw principal first and take out earnings last.

THE BOTTOM LINE Annuities purchased outside a qualified retirement plan aren’t subject to required minimum distribution rules.


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