She Bought an Annuity Inside Her IRA at 72. The Check Was Guaranteed. The RMD on It Wasn’t Covered, and the IRS Fined Her 25%.
Her annuity check arrived every month like clockwork, so she assumed the IRS was satisfied. It turned out the tax code had a completely separate opinion about the rest of her IRA, and the bill arrived with a five-figure penalty…
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Buying an immediate annuity inside a traditional IRA can create a required minimum distribution shortfall that triggers an IRS excise tax of up to 25%. When only part of an IRA is annuitized, the guaranteed annuity payments generally satisfy the RMD tied to that contract, but they do not automatically cover the RMD attributable to the remaining non-annuitized IRA balance.
This is the RMD trap that surfaces when only a portion of an IRA is annuitized, and it is a predictable consequence of two rulebooks colliding: the insurance contract governing annuity payments and the tax code governing everything else in the IRA.
RMD Age Now Sits at 73
For most retirees currently in their early 70s, the required beginning date, meaning the deadline by which the first RMD must be taken, is April 1 of the year after they turn 73. Under SECURE 2.0 the required beginning age was raised, and it is not 72 for someone reaching that age today. Buying an annuity at 72 leaves the RMD timing unchanged. The problem shows up the following year, when the account owner has a legal obligation to withdraw a minimum amount from the IRA and may wrongly assume the annuity payments already cover it.
An RMD, short for required minimum distribution, is the amount the IRS forces traditional IRA owners to withdraw each year once they reach the required beginning date. The IRS sets the amount by dividing the prior year-end balance by a life expectancy factor from IRS tables. Miss it, and the excise tax applies.
Why an Annuity Check Can Fall Short of the Full RMD
Annuitization turns a lump sum inside an annuity contract into a stream of guaranteed payments. Once that happens, those payments are the distributions from that specific contract. The complication arises when the annuity sits inside an IRA and uses only part of the total balance. The rest of the IRA still has its own RMD obligation, calculated separately on its own prior year-end value.
The way annuitized and non-annuitized IRA assets interact for RMD purposes has shifted over time. The safe takeaway is that annuity payments from an annuitized IRA contract generally satisfy the RMD for that contract, but they do not automatically cover the RMD owed on the rest of your IRA money. That is the trap. You assume one guaranteed check covers the whole RMD obligation, when in reality it only covers the piece tied to the annuitized contract. A tax professional is the right person to confirm the current treatment for your specific contract because the annuity salesperson is not required to do RMD math across the rest of the account.
25% Penalty, or 10% If Fixed Fast
The excise tax on a missed RMD used to be 50%. SECURE 2.0 reduced it to 25% and further reduced it to 10% if the shortfall is corrected within a defined correction window. The correction window generally runs through the end of the second tax year after the year the RMD was missed, provided the taxpayer takes the missed amount and files the right form.
That form is IRS Form 5329, which reports the shortfall, calculates the excise tax, and requests a reasonable-cause waiver when appropriate. Reasonable cause is a real path. A retiree who missed an RMD because of illness, a custodian error, or a misunderstanding tied to a new annuity contract can attach a statement explaining what happened and ask the IRS to abate the penalty. Waivers are not guaranteed, but the IRS has historically granted them when the taxpayer acted promptly after discovering the mistake. This annuity-inside-an-IRA tripwire is one of several quiet IRS rules that drain retirement accounts, and we mapped the rest in a free tax trap guide.
What to Confirm Before Signing
Guaranteed income has appeal, particularly with the national average 12-month CD APY at just 1.71% as of August 2026 and the 2027 Social Security COLA tracking toward 3.1%. Conservative options are offering limited yield, and a lifetime check looks attractive against that backdrop. The catch is that an IRA annuity is a tax instrument as well as an income instrument, and the tax side is where the surprises live.
Three things are worth confirming with a qualified tax professional, not the selling agent, before annuitizing any part of an IRA. First, what is the required beginning date for the specific account owner under current law?
Second, how will the annuity payments be treated relative to the RMD on the non-annuitized balance remaining in the IRA? Third, what does the reporting and correction process look like if something goes wrong, including Form 5329 and the reasonable-cause waiver? The guaranteed check is real. So is the tax code sitting behind it.
Contact [email protected] for any questions or corrections.
David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
