A 68-Year-Old Who Puts $300,000 of a $500,000 IRA Into an Annuity Locks In a $2,000 Monthly Check for Life and Shrinks the RMD on What’s Left to About $9,600 at 73. Every Dollar of Both Is Still Taxable
Moving part of a traditional IRA into a lifetime annuity before RMDs begin reshapes the tax bill in ways most retirees never see coming, and the tradeoffs reach further than the monthly check.
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Say a retiree moves part of a traditional IRA into a lifetime annuity before required minimum distributions (RMDs) kick in. To see how that plays out, picture a 68-year-old with a $500,000 IRA. Now say the retiree puts $300,000 into an annuity that pays $2,000 monthly for life and leaves $200,000 invested. That one move changes three things: how much income is guaranteed, how big future RMDs will be, and how the tax bill is built.
Who Holds This Kind of Retirement Money
The question applies to many households, as the Federal Reserve’s Distributional Financial Accounts show that households ages 55 to 69 held 49.5% of all defined contribution pension entitlements and annuities in the second quarter of 2026. That came to $8,525,063 million.
Households 70 and older held 9.4%, up from 2.3% in 1989, however the mix changes after 70. In the oldest group, traditional pension entitlements totaled $4,779,143 million, far exceeding defined contribution assets and annuities of $1,614,027 million. These are combined totals. They describe broad patterns across households in each age group rather than any single retiree’s position.
How a $2,000 Check Compares With the Premium
A $24,000 annual payment on a $300,000 premium is equivalent to an 8% payout rate. Actual quotes will depend on the buyer’s age and sex, interest rates at the time of purchase, and whether the contract includes a survivor or refund feature. A life-only contract usually pays the most, and payments stop when the annuitant dies.
Most annuity checks of this kind pay a fixed amount. The Bureau of Labor Statistics research index for Americans 62 and older, which weights housing and medical care more, was 354.818 in November 2025.
By September 2026, it was 368.066, up about 3.7%. If prices rose 3% a year for 20 years, the $2,000 check would buy about what $1,107 buys today.
Why the RMD Falls to About $9,600
IRA owners who reach 72 after December 31, 2022, must start RMDs by April 1 of the year following the year you reach age 73, according to IRS Publication 590-B. The account RMD is the prior year-end balance divided by the distribution period from the IRS Uniform Lifetime Table (26.5 at age 73).
Say the remaining $200,000 grows 5% a year for five years. It would reach about $255,256. Dividing by 26.5 gives an RMD of roughly $9,632.
Leave the full $500,000 invested at the same rate and the balance would be about $638,141, with a first RMD near $24,081 (reducing a pre-tax balance before that first required withdrawal lands is the whole subject of our free RMD tax guide). The annuity follows its own rules: under 26 CFR 1.408-8(a), distributions from an individual retirement annuity are figured under the separate annuity provisions, and the regular payments generally count as the distribution for that portion.
Every Dollar Still Counts as Taxable Income
Under 26 U.S.C. § 408(d)(1), any amount paid from an IRA is included in gross income, following the annuity rules in section 72. Section 72(b) only allows an exclusion for the investment in the contract, and pretax IRA money usually has no such basis. That makes both the annuity checks and the RMD fully taxable.
The annuity payments therefore replace the income the smaller RMD removes. In the example, the annuity plus the RMD total $33,632 a year, more than the roughly $24,081 RMD the person would face without the annuity.
Social Security adds to that. After the 3.6% cost-of-living adjustment for 2027, the average retired worker gets $2,170 a month, or $26,040 a year. Together, all three total about $59,672, though only part of a Social Security benefit is usually taxed.
Medicare premiums also depend on income, as the standard Part B premium for 2026 is $202.90 a month. Single filers with income over $109,000 pay $284.10, and the first surcharge for joint filers starts above $218,000. The example household falls well below both, but larger IRAs or other income could push it higher.
What Could Change the Math
The $9,600 figure assumes 5% annual growth, which means that higher or lower returns would raise or lower it, and later RMDs would change as the divisor decreases each year. For the money still invested, I Bonds offer one inflation-linked point of comparison, with a composite rate of 4.26% through October 31, 2026.
A few things are worth tracking each year: how prices for older households compare with the Social Security adjustment, where the Medicare surcharge thresholds are set, and how the household’s state taxes retirement income. Recent coverage has looked at which states do not tax retirement income. The annuity payments arrive on a fixed schedule. Federal tax applies to every dollar, as it would without the annuity.
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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.
