SECURE 2.0 Offers a Powerful Retirement Income Planning Opportunity

August 4, 2023

In this article, the authors examine a little-known provision in the recently enacted SECURE 2.0 retirement legislation concerning the required minimum distribution rules and explain how it can help taxpayers.

The federal tax regulations implementing the required minimum distribution (RMD) rules for retirement plans have a long-standing glitch concerning benefits paid in the form of periodic annuity payments. If an individual annuitizes part of her account balance in a defined contribution plan or IRA, the RMD regulations have ignored that the individual typically will receive materially larger distributions than what would be required if she had not annuitized. In other words, the “minimum” required distributions become larger. In this sense, the RMD rules essentially penalize partial annuitization, and in doing so potentially discourage an individual from annuitizing a portion of her account balance by forcing her to deplete her non-annuitized retirement savings too quickly.

Scrutiny of this inappropriate penalty has intensified in recent years, as an aging population and the decline of the defined benefit pension plan system have heightened awareness of the need for the guaranteed income for life that an annuity can provide. Without guaranteed income for life, many individuals run a material risk of outliving their private retirement savings. The focus on this RMD regulatory glitch culminated in the adoption of a corrective provision in section 204 of the SECURE 2.0 Act of 2022 (P.L. 117-328), which eliminates the penalty on partial annuitization by facilitating parity under the RMD rules for partially annuitized and non-annuitized forms of distribution.

This SECURE 2.0 provision can have a dramatic effect on RMDs, but surprisingly has garnered little attention since its enactment in December 2022. This article highlights the powerful effect of this provision. As illustrated later, when an individual annuitizes a little less than half of her account, this provision can reduce RMDs from the non-annuitized part of the account by almost 90 percent. These results are no windfall; they merely reflect a new ability to achieve parity — and equity — under the RMD rules for individuals who choose to use some of their retirement savings to obtain the valuable protections that annuitization provides.

Section 204 of SECURE 2.0

Under the RMD rules, individuals must begin receiving a minimum amount from their retirement plans and IRAs each year upon reaching age 73 (to be later increased to 75), based on their remaining life expectancy. Section 204 of SECURE 2.0 directs Treasury to amend its RMD regulations to eliminate a “penalty on partial annuitization” under qualified defined contribution plans and IRAs. The new rule is immediately effective, without the need for new RMD regulations to implement it.

The issue addressed by section 204 can be explained as follows. Under the pre-SECURE 2.0 RMD rules, annuitizing a portion of one’s retirement savings generally produces a higher benefit payment for the individual than the RMD amount the individual would have been required to withdraw if they had not annuitized. This occurs naturally because annuity payments are generally higher than the required withdrawals under similar economic assumptions using the method the RMD rules apply to non-annuitized accounts.1 The problem is that when computing the RMD amount that an individual must withdraw from her non-annuitized account, she does not get any credit under the RMD rules for the fact that the annuity payments from the annuitized portion are higher than the minimum withdrawals would have been.2 As illustrated below, SECURE 2.0 provides individuals with the option of taking credit for that higher payment.

Let’s assume that Ruth turns 75 years old in 2023 and her retirement savings consist entirely of a $475,000 traditional (non-Roth) IRA. In December Ruth decides to purchase a single life annuity using a little less than half ($200,000) of her traditional IRA to supplement her Social Security benefits. That annuity will pay Ruth $18,500 per year as long as she lives, starting in January 2024.3 The new RMD rule for partial annuitizations in SECURE 2.0 comes into play beginning with Ruth’s RMD calculation for 2024:

  • Old RMD Rule. Under the old rule for partial annuitizations, which Ruth may still choose to use, Ruth’s RMD for 2024 would equal the sum of (1) her $18,500 annuity payment that year, plus (2) a calculation based on the account balance of the nonannuitized portion of her IRA as of December 31, 2023. That balance was $275,000, so Ruth’s RMD for her nonannuitized account in 2024 would be $275,000 divided by 23.7 (her life expectancy factor from the IRS’s uniform lifetime table), or $11,603. Thus, in 2024 Ruth would receive her $18,500 annuity payment, and she must withdraw a minimum of $11,603 from the non-annuitized portion of her IRA.
  • New RMD Rule. If Ruth instead elects to use the new rule in SECURE 2.0, her 2024 RMD is calculated differently. We explain this calculation in more detail below, but, in short, Ruth would first add the values of the annuitized and non-annuitized portions of her IRA as of December 31, 2023. On that date, the non-annuitized account was valued at $275,000, and the annuity had a present value of $200,000,4 for a total value of $475,000. Next, a total RMD amount is calculated as her total value of $475,000 divided by 23.7 (the same uniform lifetime table factor used above), or $20,042. Finally, Ruth’s annual annuity payment of $18,500 is subtracted from $20,042, leaving a remainder of $1,542. Based on this calculation, in 2024 Ruth would be required to withdraw only $1,542 from her nonannuitized IRA, in addition to receiving her $18,500 annuity payment.

As the example above illustrates, compared with the old RMD rule calculation, Ruth’s RMD calculation under the new rule in SECURE 2.0 represents a nearly 90 percent reduction in the RMD amount that Ruth must take from the nonannuitized portion of her IRA in 2024 — from $11,603 to $1,542. This lower amount of $1,542, when added to her $18,500 annuity payment, exactly equals what her RMD would have been if she had not annuitized — thereby achieving parity for partial annuitization under the RMD rules.5

With this example in mind, it is simpler to explain the mechanics of section 204 of SECURE 2.0. To accomplish its goal of parity and address the glitch in the tax regulations, SECURE 2.0 provides that if an employee’s retirement benefit is in the form of a non-annuitized individual account under a 401(k) or other defined contribution plan or an IRA, then the plan may allow the employee to elect to have the annual RMD for that account calculated as “the excess of the total required amount for such year over the annuity amount for such year.”6

Here, the “total required amount” means the amount that would be required to be distributed for the year under the RMD regulations that apply to non-annuitized account balances, by treating the previous year-end account balance used in that calculation as including (1) all the participant’s non-annuitized benefits under the plan ($275,000 in the example), plus (2) the value at the end of the previous calendar year (if any) of all the participant’s annuitized benefits that had been purchased with the account ($200,000 in the example).

The RMD amount that is then required under the new rule for the non-annuitized account equals the excess, if any, of the total required amount ($20,042 in the example) over the sum of the annuity payments made under the plan during the year ($18,500 in the example, for a net RMD obligation of $1,542 for the non-annuitized account). In other words, any extra distribution an individual receives as an annuity payment above the RMD amount that otherwise would have applied based on the value of the annuitized portion may be used to offset the RMD amount that is required from the non-annuitized portion of the account. This means the individual’s RMD is no higher by reason of having partially annuitized the account, thereby eliminating the penalty in the regulations that Congress targeted in SECURE 2.0 and achieving parity in the RMD rules for partially annuitized and non-annuitized forms of distribution.

Additional Examples

The example involving Ruth compares the difference in RMD amounts under the old rule and the new rule for just one year (2024). The effect over time is even more stunning. By the time Ruth reaches age 95 in 2043, she would have been required to take withdrawals from the nonannuitized portion of her IRA over the period of 2024-2043 totaling $323,914 under the old rule versus only $251,347 under the new rule, assuming a 4 percent rate of return. If we assume that Ruth withdrew only her RMD each year from the non-annuitized portion of her IRA, and that she earned an average annual return of 4 percent on her account, the remaining balance of her IRA at age 95 would be $136,036 under the prior rule versus $275,964 under the new rule — a difference of $139,928 and an increase under the new rule of 103 percent.7

The new RMD rule can be very helpful in a wide variety of situations tailored to meet the guaranteed lifetime income and asset needs of an individual. For example, assume that Ruth annuitized only $100,000 of her $475,000 account balance in 2023, leaving the non-annuitized portion at $375,000. That $100,000 annuity would generate annual income of $9,250 for Ruth. Under the old RMD rule, Ruth would be required to take an RMD of $15,823 in 2024 from the nonannuitized portion of her IRA (assuming a December 31, 2023, account value of $375,000). If Ruth elects the new rule, her RMD from the nonannuitized portion would be reduced to $10,792 — a decrease of 32 percent in 2024 alone.8

Implementation Questions

As is typical of most law changes, the new RMD rule for partial annuitizations under SECURE 2.0 raises some implementation questions that we anticipate Treasury and the IRS will address through the amendments they are required to make to the RMD regulations and possibly other forms of guidance. Below are some of the issues for which guidance will be needed:

  • Valuation of annuitized contracts. As discussed and illustrated in the examples, the use of the new partial annuitization rule requires an annual determination of the value of the annuitized contract (or the annuitized portion of that contract). The statute does not elaborate on this valuation. The RMD rules generally require the fair market value of all assets to be included in the numerator of the RMD calculation for non-annuitized accounts. Thus, the value of an annuitized benefit for purposes of the calculations required under the new partial annuitization rule should also reflect the FMV of that benefit. There may be several reasonable ways to approach this. Obtaining an actuarial present-value calculation would seem to suffice.9 Also, existing regulations addressing how to value a traditional individual retirement annuity in a Roth conversion could provide analogous guidance.10 Guidance also may be needed regarding when individual taxpayers and plan sponsors and administrators can rely on third-party valuations for purposes of the new rule.
  • Aggregation under the new rule. Under the new partial annuitization rule, all the IRAs that a person holds as the owner (or all the IRAs that a person holds as a beneficiary of the same decedent) are aggregated and treated as one plan. The new rule also provides for the aggregation of section 403(b) annuities. Thus, for example, it seems clear that when calculating the “total required amount” under the new rule, the calculation should reflect the aggregate account balances of all the IRAs that an individual owns. Less clear under the new rule is whether an annuity distributed from an employer plan would still be treated as part of the plan and thus aggregated with any remaining account balance in the plan. From a public policy perspective of seeking RMD parity for plan participants who partially annuitize their plan benefits, the answer clearly should be yes, but Treasury guidance will be needed to address this question.

New Rule is Available Now

The new rule is available now. Congress provided that taxpayers may immediately rely on their “reasonable good faith interpretations” of the new RMD rule for partial annuitizations until Treasury amends its regulations to incorporate it.

Individuals seeking to use a portion of their plan or IRA to protect themselves against the risk of outliving their retirement savings can now do so without an RMD penalty. The new rule can reduce the RMDs payable from their nonannuitized account balance substantially enough to avoid increasing their overall RMD obligation merely because they chose to obtain the important protections that annuitization can provide. This new parity between annuitized and non-annuitized forms of distribution under the RMD rules can only help encourage individuals to elect lifetime income under their defined contribution plans and IRAs, a goal with clear societal benefits that policymakers have long sought to achieve.

Originally Published on Tax Notes Federal
Written by Kent A. Mason, Bryan W. Keene, and Courtney A. Zinter of Davis & Harman LLP


  1. See, e.g., Jeffrey R. Brown, The New Retirement Challenge (Sept. 2004) (describing a “mortality premium” associated with the risk-pooling nature of insurance that results in annuity payments typically exceeding the income that can be generated using a withdrawal-based distribution method). ↩︎
  2. No RMD “credit” for the “excess” annuity payments is provided under the old rule because the RMD regulations treat the entire annuity payment as an RMD and do not coordinate annuity payments with withdrawals. ↩︎
  3. The annuity values in this example are based on calculations made on May 4, 2023, using the website, which provides instant quotes based on a comparison of annuities from multiple available insurance companies. Results using this calculator may vary depending on the date the calculation is performed. ↩︎
  4. This assumes that the present value of the annuity equals the single premium paid for it, because the present-value calculation is performed shortly after the purchase date. ↩︎
  5. If Ruth had not annuitized, her RMD for 2024 would be determined by dividing her account balance as of year-end 2023 ($475,000) by her uniform lifetime table factor (23.7), resulting in an RMD of $20,042. This exactly equals the sum of her annuity payment and adjusted RMD for her non-annuitized account in 2024 ($18,500 + $1,542). ↩︎
  6. It appears that the provision applies only in cases in which employees annuitize some, but not all, of their individual account balance; that is, they must have a non-annuitized account balance against which the excess annuity payments can be used as an offset. ↩︎
  7. The RMD calculations reflect the following assumptions. The nonannuitized account earns interest at an annual rate of 4 percent, compounded annually. Withdrawals are taken from the non-annuitized account at the end of each year in an amount equal to the RMD for the non-annuitized account each year. No additional contributions or withdrawals are made. The annuity was assumed to have been purchased December 1 of the year the annuitant attained age 75, and the payments were assumed to have started on January 1 of the following year. The dollar amount of the annuity payments was determined as described in supra note 3. The present value of those annuity payments was redetermined each year using the calculator on, by inputting the dollar amount of the annual payments and the (increased) age of the annuitant each year, then solving for the single premium that would be needed to purchase that annuity payout each year. These annual present-value amounts were then added to the balance of the non-annuitized account each year when applying the new SECURE 2.0 rule to determine the adjusted RMD for the non-annuitized account each year. ↩︎
  8. These calculations reflect assumptions that are consistent with the assumptions used in the other examples in this article, e.g., values determined on ↩︎
  9. See, e.g., reg. section 1.401(a)(9)-6, Q&A-12; prop. reg. section 1.401(a)(9)-6(m)(2). ↩︎
  10. Reg. section 1.408A-4, Q&A-14. ↩︎