Do You Have to Take an RMD From a Non-Qualified Annuity?

You do not have to take an RMD from a non-qualified annuity during your lifetime. The required minimum distribution rules that force withdrawals from traditional IRAs and 401(k)s starting at age 73 do not apply to annuities funded with after-tax dollars. You can leave the money in the contract as long as you want, and the earnings keep growing tax-deferred until you decide to withdraw them. The picture changes after you die, when your beneficiary runs into mandatory payout deadlines that work a lot like RMDs even though the tax code calls them something else.

Why the RMD Rules Skip Non-Qualified Annuities

RMDs exist because of a trade. Qualified accounts like traditional IRAs and 401(k)s let you deduct contributions or defer tax on the money going in, and in exchange the government eventually forces you to pull that money out and pay income tax on it. The forced withdrawal starts the year you turn 73 under current law, rising to 75 in 2033.¹

A non-qualified annuity never got that upfront break. You funded it with money you had already paid tax on, so the government has no deferred tax waiting on your principal. Only the investment earnings grow tax-deferred.² Without a bargain to enforce, there is no RMD schedule, no age-73 trigger, and no 25% excise penalty for failing to withdraw. The 25%-to-10% penalty structure that applies to missed RMDs on qualified accounts simply has nothing to attach to.¹

You decide the timing. You can leave the account alone for decades, take ad-hoc withdrawals, annuitize into a stream of payments, or do nothing at all.

What Happens When You Do Take Money Out

No RMD does not mean no tax. When you withdraw from a non-qualified annuity before converting it into a payment stream, the IRS applies a last-in, first-out rule. Every dollar of earnings comes out first and is taxed as ordinary income. You do not reach your original after-tax principal until all the gains have been distributed.

An example: you put in $50,000 and the contract grew to $70,000. The first $20,000 you withdraw is fully taxable earnings. Only after that are you drawing from the $50,000 of principal, which comes back tax-free because you already paid tax on it. You cannot pick which dollars come out first.

If you own several non-qualified annuity contracts from the same insurance company purchased in the same calendar year, the IRS treats them as a single contract for figuring the taxable portion of each withdrawal. Splitting money across multiple contracts with one insurer in one year will not change the math.

The insurer reports the taxable gain and the non-taxable return of principal on IRS Form 1099-R.³

The Age 59½ Rule Still Applies

The absence of an RMD at the top end does not mean free access at the bottom end. Withdraw earnings from a non-qualified annuity before age 59½ and you owe a 10% additional tax on top of ordinary income tax. The penalty comes from Section 72(q), which governs non-qualified annuities and has its own list of exceptions.⁴

The 10% penalty does not apply to:

Distributions made after the annuity holder’s death.
Withdrawals attributable to the owner becoming disabled.
Substantially equal periodic payments calculated on your life expectancy or the joint life expectancies of you and your beneficiary. Once you start, the payments must continue for at least five years or until you turn 59½, whichever is later; changing the amount early triggers retroactive penalties on every prior distribution.
Immediate annuities purchased with a single premium where payments begin within one year in substantially equal installments.

The penalty and any exception you claim are reported on IRS Form 5329.⁵

Mandatory Distributions After the Owner Dies

Death is where something RMD-like finally kicks in. The beneficiary of a non-qualified annuity must follow mandatory distribution timelines under Section 72(s), and the options depend on who the beneficiary is.⁴ This is where many families get caught off guard, because the owner spent a lifetime without any mandatory withdrawal and the beneficiary assumes the same freedom carries over.

Surviving Spouse

A surviving spouse named as the designated beneficiary has the most room. Section 72(s)(3) lets the spouse step into the owner’s shoes and continue the contract as their own.⁴ The tax deferral continues, nothing has to be distributed, and the surviving spouse can wait until their own death before any payout clock starts.

Non-Spouse Beneficiaries

A non-spouse beneficiary has two choices. The default is the five-year rule: the entire account value must be out by December 31 of the fifth year after the owner’s death. You can take it all at once, spread it across the five years, or combine withdrawals however you like, but the account has to be empty by that date.

The alternative is the life expectancy payout, sometimes called a stretch. Under Section 72(s)(2), you can take distributions over your own life expectancy, which spreads the taxable income across many more years. The condition is that payments must begin within one year of the owner’s death.⁴ Miss that one-year election window and you default into the five-year rule, with no way to switch back.

No Step-Up in Basis

Non-qualified annuities do not get the step-up in cost basis that passes with inherited stocks or real estate. The beneficiary takes over the original owner’s basis, and all the accumulated earnings remain taxable as ordinary income when distributed. If the owner invested $100,000 and the annuity was worth $180,000 at death, the beneficiary owes income tax on the $80,000 of gain regardless of the date-of-death value.

When a Trust or Entity Owns the Contract

The no-RMD answer assumes the owner is a human being. If a corporation, partnership, or certain trusts hold the annuity, Section 72(u) strips away annuity tax treatment entirely. The annual increase in contract value is taxed as ordinary income every year, and the deferral benefit disappears.⁴

There is an exception when a trust holds the annuity as an agent for a natural person. The IRS has applied this to grantor trusts and to non-grantor trusts whose sole beneficiary is an individual. A few other arrangements also escape the non-natural-person rule: annuities acquired by a decedent’s estate, immediate annuities, and annuities held under qualified employer plans.⁴ If you are thinking about placing a non-qualified annuity inside a trust, the structure determines whether you keep the deferral or lose it on day one.

1
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
2
Fidelity. How Qualified Annuity Income Could Help Satisfy RMDs
3
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
4
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Internal Revenue Service. 2025 Instructions for Form 5329