While a cash RMD is required each year after the taxpayer turns 73 (72 in 2020-2022, 70½ before 2020) regardless of general market conditions, it is important to remember that IRA assets may be invested in a variety of holdings, including securities and funds that will fluctuate with the equity markets. Unfortunately, the RMD requirements may, depending on market performance, cause taxpayers to miss market upswings by requiring that the taxpayer liquidate securities held within the IRA to satisfy his or her RMDs. Using a fixed income annuity can help reduce this risk because the payments are fixed in advance.
In other words, there is no investment decision required each year because the taxpayer has already determined the value of the payout (whether it is made monthly, quarterly or annually). While the RMD for any non-annuitized portion of the IRA will still have to be calculated, the value of the annuity is excluded from this calculation, thereby reducing the risk that the taxpayer will be forced to make an unfavorable investment decision simply to comply with the RMD rules.
Further, the fixed income annuity actually allows the taxpayer to set an income level in advance—RMDs will fluctuate with the IRA value in any given year, but the annuity payments will remain constant regardless of the performance of the remaining underlying IRA assets. Taxpayers also have the option of adding a cost-of-living increase to the annuity payouts to ensure sufficient income during retirement.