You are not required to take an RMD from a non-qualified annuity. Unlike a traditional IRA or 401(k), which force withdrawals starting at age 73, a non-qualified annuity has no lifetime required minimum distribution. You can leave the money untouched for as long as you want. That freedom ends when the owner dies, and it does not mean withdrawals are tax-free along the way, so the rest of the picture is worth understanding before you either leave the money alone or start pulling it out.
Why the RMD Rules Don’t Apply
RMDs exist because of a trade. 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 the money out and taxes it. That forced withdrawal is the RMD, and under current law it starts the year you turn 73, rising to 75 in 2033.1Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
A non-qualified annuity is funded with after-tax dollars. The government already collected tax on every dollar you contributed, so only the investment earnings grow tax-deferred.2Fidelity. How Qualified Annuity Income Could Help Satisfy RMDs Because there is no deferred tax on the principal, there is no schedule forcing you to withdraw it. The 25% excise tax that punishes a missed RMD on a qualified account (reduced to 10% if corrected within two years) has no equivalent here, because there is no minimum you are required to take.1Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
Withdrawals Are Still Taxed, Earnings First
No RMD is not the same as no tax. When you take money out of a non-qualified annuity before annuitizing the contract, the IRS applies a last-in, first-out rule. Every dollar of earnings comes out first, and every dollar of earnings is taxed as ordinary income. You do not reach your original after-tax principal until all the gains have been distributed.
Say you put in $50,000 and the account grew to $70,000. The first $20,000 you withdraw is fully taxable earnings. After that, your withdrawals start coming from the $50,000 of principal, which returns to you tax-free because you already paid tax on it. This ordering front-loads the tax bill, and you cannot cherry-pick which dollars come out first.
If you own multiple non-qualified annuity contracts issued by the same insurance company in the same calendar year, the IRS treats them as a single contract for figuring the taxable portion. Splitting money across contracts with one insurer will not get around the LIFO math.
The taxable earnings portion of any withdrawal shows up on Form 1099-R, which separates the taxable gain from the non-taxable return of principal.3Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
The 10% Penalty Before Age 59½
If you withdraw earnings before age 59½, you owe a 10% additional tax on top of ordinary income tax. For non-qualified annuities this penalty comes from Section 72(q), which has its own set of exceptions separate from the ones covering IRAs and 401(k)s.4Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The 10% does not apply to:
- Distributions made after the annuity holder dies.
- Withdrawals attributable to the owner becoming disabled.
- Substantially equal periodic payments, made at least annually and calculated on your life expectancy or the joint life expectancies of you and your beneficiary. Once you start, payments must continue for at least five years or until you turn 59½, whichever comes later. Changing the amount before that window closes triggers retroactive penalties on every prior distribution.
- Immediate annuities purchased with a single premium, where payments begin within one year and are made in substantially equal installments.
The penalty and any exception are reported on Form 5329.5Internal Revenue Service. 2025 Instructions for Form 5329
Big Withdrawals Can Trigger Other Taxes
Because timing is now your decision instead of the IRS’s, the size of a withdrawal in any one year matters. Two additional taxes catch people off guard.
The 3.8% Net Investment Income Tax
Taxable earnings from a non-qualified annuity count as net investment income for the 3.8% surtax under Section 1411.6Internal Revenue Service. Questions and Answers on the Net Investment Income Tax The tax kicks in when modified adjusted gross income exceeds $200,000 (single) or $250,000 (joint).7Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Those thresholds are not indexed for inflation. A single large annuity withdrawal can push you over the line and subject investment income you would otherwise keep to an extra 3.8%.
Medicare Premium Surcharges
Taxable annuity earnings flow into the MAGI figure Medicare uses to set Part B and Part D premiums. Income above the thresholds triggers an Income-Related Monthly Adjustment Amount on top of the standard premium. For 2026 the standard Part B premium is $202.90 per month. Single filers with MAGI above $109,000, or joint filers above $218,000, start paying surcharges that reach $689.90 per month at the top bracket.8Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles Medicare looks at your tax return from two years earlier, so a large 2026 withdrawal would raise your 2028 premiums. Spreading withdrawals across years can keep you below the thresholds.
What Happens After the Owner Dies
The lifetime freedom from RMDs ends at death. Beneficiaries then face mandatory distribution timelines under Section 72(s), and the options depend on who is inheriting.4Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
Surviving Spouse
A surviving spouse named as beneficiary can step into the owner’s shoes under Section 72(s)(3) and continue the contract as their own. Tax deferral continues, no distribution is required, and any mandatory payout is delayed until the spouse’s own death.
Non-Spouse Beneficiaries
A non-spouse beneficiary has two options. The default is the five-year rule: the full value of the annuity must be distributed 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 use any pattern in between, as long as the account is empty by the deadline.
The alternative is a life expectancy payout, sometimes called a stretch. Under Section 72(s)(2) you can spread payments and the associated tax over your own life expectancy, but you must begin receiving those payments within one year of the owner’s death. Miss that election window and you default into the five-year rule. This is where most inherited annuity mistakes happen: the beneficiary does not realize the clock is running until it is too late to stretch.
No Step-Up in Basis
A non-qualified annuity does not receive a step-up in cost basis at the owner’s death. The beneficiary inherits the original owner’s basis, and all the accumulated earnings remain taxable as ordinary income when distributed. If the owner put in $100,000 and the annuity grew to $180,000, the beneficiary owes ordinary income tax on the $80,000 gain regardless of the account’s value on the date of death.
A Boundary Worth Knowing: Trust or Entity Ownership
The tax deferral on a non-qualified annuity depends on who owns the contract. If the owner is not a natural person, meaning the annuity is held by a corporation, partnership, or certain trusts, Section 72(u) strips away annuity tax treatment. The annual increase in contract value is taxed as ordinary income each year, wiping out the deferral.4Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
There is an important carve-out: if a trust holds the annuity as agent for a natural person, deferral survives. The IRS has applied this exception to grantor trusts and to non-grantor trusts whose sole beneficiary is an individual. Annuities acquired by a decedent’s estate, immediate annuities, and annuities held under qualified employer plans also escape the non-natural-person rule. If you are considering putting a non-qualified annuity into a trust for estate planning, the trust structure matters. Getting it wrong means losing tax deferral on day one, which is a far bigger cost than any RMD would ever be.