Annuities Inside an IRA, and What Happens at Death

The “no double deferral” point

A deferred annuity’s signature tax feature is that its gains grow untaxed until withdrawal. But an IRA already provides that deferral by law. So an annuity held inside an IRA does not add a second layer of tax deferral — the deferral comes from the IRA wrapper, not the annuity. Understanding that is the starting point: whatever the reason to hold an annuity in an IRA, the income-tax deferral is not it, because the IRA supplies it regardless of what the IRA holds. (Relatedly, the § 72(u) rule that strips deferral from annuities owned by non-natural persons does not apply to annuities held under a qualified plan or IRA — those are carved out — because the account’s own rules govern instead.)

How it interacts with required distributions

An IRA is subject to required minimum distributions once the owner reaches RMD age (currently 73). When part of the IRA is an annuity that has been “annuitized” into a stream of payments, those payments are generally treated as satisfying the RMD for that portion, and the rest of the IRA is handled under the ordinary RMD rules (IRC § 401(a)(9); Treas. Reg. § 1.401(a)(9)-6). The coordination between an annuitized piece and the rest of the account is a common source of confusion, and worth confirming with the custodian in writing.

The qualified longevity annuity contract (QLAC)

One specific IRA annuity gets special treatment: the qualified longevity annuity contract, or QLAC. A QLAC lets an IRA owner set aside a portion of the account for guaranteed income starting later in life — as late as age 85 — and, crucially, the amount placed in a QLAC is excluded from the balance used to compute RMDs until the QLAC’s payments begin. That can reduce required distributions during the owner’s 70s and early 80s.

A QLAC is a mechanics tool for managing longevity risk and the timing of required distributions — not a product this page endorses. Whether one fits a given plan is a question for a qualified professional.

Which death rules apply

Here is the point most relevant to estate planning: an annuity held inside an IRA follows the retirement-account death rules, not the non-qualified annuity rules. So at the owner’s death, the inherited IRA — annuity and all — is governed by IRC § 401(a)(9): the surviving-spouse options, the eligible-designated-beneficiary categories, and the 10-year rule for everyone else, exactly as covered on the spouse-vs-non-spouse and 10-year-rule pages. This is a different regime from a non-qualified annuity owned outside a retirement account, which follows § 72(s) and its five-year default — the subject of our trust-as-annuity-beneficiary page. Confusing the two leads to the wrong post-death plan.

Sources & methodology