Ask an Advisor: Is It Smart to Convert My Retirement Savings Into Annuities to Satisfy My RMDs?

I’ve received letters from the thrift savings plan (TSP) and from my IRA holder that I am subject to RMDs this year. I’ve also been advised that converting these qualified funds to annuities and beginning distributions (which would then be completely taxable) satisfies the RMD requirements, which would then no longer apply. What are your feelings about converting qualified funds to annuities? – Robert

Required minimum distributions, or RMDs. The much-maligned and largely unavoidable bane of retirees’ existence. Many folks turn to annuities to simplify the process and satisfy mandatory withdrawals. It’s admittedly appealing, but as with most financial decisions, it’s not always quite that simple, or at least it shouldn’t be viewed as such. The decision to convert qualified savings to an annuity should be evaluated in the context of your overarching retirement goals and objectives, not in a vacuum to avoid a headache.

Let’s unpack the tradeoffs.

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The Appeal of Annuities as an RMD Solution

RMDs can be frustrating. The idea that you must start withdrawing a portion of your pre-tax retirement savings each year once you turn 73, and pay income taxes to the IRS on those distributions – whether you need money or not – might not seem fair. But they’re a fact of life, so we must accommodate the rules and respond accordingly.

In a vacuum, annuities are a rational response. When you convert your IRA, TSP or other qualified funds into an annuity contract, you essentially turn a portion of your savings into a guaranteed stream of income. Even better, RMD rules no longer apply to the converted assets since the payments you receive count as distributions. These distributions, like those you would take in the form RMDs, are taxable as ordinary income.

This all sounds like a major win on paper. No RMD calculations, fewer moving parts and predictable income for life.

Annuities could also be a win for those who stand to benefit from potentially mitigating longevity risk, have highly predictable income needs, value simplicity or have other assets that are exposed to market volatility. But for those who don’t have one of these needs, annuities might not present the same value proposition.

Need help with annuities? Ask a financial advisor about them today.

The Drawbacks of Annuities

The biggest challenge with annuities is that the decision is largely irreversible. Once you convert your qualified savings to an annuity, you can’t take money out on your own terms without significant penalties. You’ve exchanged liquidity and flexibility for income stability. If you need a new roof, a new car or to fund major medical expenses – and you don’t have other funds to tap into – then you could find yourself in a tough situation.

Moreover, annuities should not be viewed as a tidy tax solution. Like RMDs, annuity payments are fully taxable as ordinary income. So annuities just change the delivery mechanism, although they could change the timing and size of your tax bills.

For some, annuities might also represent an inefficient means of achieving planning goals. If your primary motivation for annuitizing qualified savings is simply to satisfy RMDs, and if you have other planning goals, then you may be solving the wrong problem. More flexible, tax-efficient ways to address RMDs without ceding access to savings do exist.

Lastly, and importantly, consider the type of contract you’re engaging in and the strength of the insurance company that will issue the contract. With respect to the type of annuity, there are “term certain” and “life expectancy” annuities. Term certain contracts make fixed payments for a defined period of time, while life expectancy annuities provide payments for the rest of your life.

Health expectations play a big role in determining the type of policy that makes the most sense for a given person or couple. With respect to insurer strength, while most annuity providers are highly regulated and financially sound, your guarantee is only as strong as the issuing company. Be sure to do your due diligence.

Alternative Strategies for Managing RMDs

RMDs are a necessity, but they should not necessarily be viewed as an evil. If you don’t need the income, then there are other options besides an annuity that can help you put those distributions to better use.

Qualified charitable distributions (QCDs): If you’re age 70½ or older, you can direct up to $108,000 in 2025 (indexed to inflation) from your IRA to a qualified charity. The amount counts toward your RMD but is excluded from taxable income. This can be a win-win for charitably inclined retirees who don’t require the income.
Roth conversions: Converting some of your traditional IRA or TSP balance to a Roth IRA before RMDs begin can reduce future RMDs and create a tax-free income source later.
Tax-efficient reinvestment: If you don’t need your RMD immediately for spending, then you can reinvest the distributions in a taxable brokerage account. You can then invest the funds in tax-efficient assets like ETFs and municipal bonds.

Which approach or combination of approaches you choose depends on your income needs, tax situation and long-term goals. But all should, in theory, offer more flexibility than an annuity contract.

Putting It All Together

Annuities are not inherently good or bad. They are just another financial tool in a retirees toolbox. And like any financial tool, their effectiveness depends on how they fit within your overall plan.

If you already have a guaranteed income solution, and if you don’t need any more, then adding another annuity may just reduce your flexibility. Conversely, if you have a long life expectancy, prefer the security of predictable income, have other assets that can easily be accessed in the event of an emergency or long-term health care need, then annuitizing a portion of your assets could make sense.

The key is to make sure any such decision is driven by your broader retirement objectives, like cash flow, tax management, estate goals and peace of mind, and not just by the desire to “make RMDs go away.”

Retirement Planning Tips

Finding a financial advisor who can help with your retirement plan doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Smartasset’s retirement calculator can help you get a quick read on how you’re pacing towards hitting your retirement goals.

Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Jeremy Suschak, CFP®, is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Jeremy is a financial advisor and head of business development at DBR & Co. He has been compensated for this article. Additional resources from the author can be found at dbroot.com. Please note that Jeremy is not a participant in SmartAsset AMP and is not an employee of SmartAsset.