If you own a deferred annuity and you’re wondering whether to flip the switch to income mode right now, the honest answer is: it depends on your other income sources, your age, and how turning on those payments could ripple through your tax bill, your Medicare premiums, and your required minimum distributions. For most retirees between 65 and 75, the decision isn’t just about cash flow—it’s about timing that income stream so it works with the rest of your financial picture, not against it.

What Does “Turning On” Annuity Income Actually Mean?

When you “annuitize” or activate the income rider on a deferred annuity, you’re telling the insurance company to start sending you regular payments—monthly, quarterly, or annually. Those payments can be guaranteed for a set number of years, for your lifetime, or for the lifetimes of both you and a spouse. Once you flip that switch on most traditional annuity contracts, it’s permanent. That’s why the timing matters so much. You’re not just deciding how much money you’ll get—you’re locking in when you get it and, in many cases, how long those payments last.

Before you make that call, it pays to look at the full picture of your retirement income.

How Does Annuity Income Affect Social Security Taxes?

Here’s something that surprises a lot of retirees: adding annuity income to your monthly budget can push more of your Social Security benefit into taxable territory. Up to 85% of your Social Security benefit can become taxable depending on your “combined income” (that’s your adjusted gross income, plus any nontaxable interest, plus half of your Social Security benefit). Annuity payments count as ordinary income and go straight into that combined income calculation.

If your combined income crosses $34,000 as a single filer (or $44,000 for married couples filing jointly), up to 85% of your Social Security benefit is taxable at your regular income tax rate. If you’re already near those thresholds, activating a large annuity income stream could mean you’re suddenly paying federal income tax on a chunk of Social Security you weren’t paying tax on before.

This is especially worth watching if you’re delaying Social Security to maximize your benefit—which, by the way, is often a smart move. Each year you delay past your full retirement age (up to age 70), your benefit grows by about 8%. But if annuity income is already filling your income needs, delaying Social Security remains a powerful option.

What Are the RMD Rules for 2025 and 2026, and Do They Change the Math?

Required minimum distributions—RMDs—are the amounts the IRS requires you to withdraw from traditional IRAs and most 401(k)s each year starting at age 73 (under current law as of 2026). If your annuity is held inside an IRA or other qualified retirement account, RMD rules apply to it. If it’s a non-qualified annuity (meaning you bought it with after-tax money outside of a retirement account), RMDs don’t apply to the annuity itself—though you still owe taxes on the earnings portion of any payments you receive.

For 2025 and 2026, the RMD rules haven’t dramatically changed from recent years. You calculate your RMD by dividing your account balance (as of December 31 of the prior year) by a life expectancy factor from IRS tables. If activating annuity income from a qualified annuity satisfies your RMD for the year, that’s one less calculation to worry about—and potentially a reason to act sooner rather than later.

Could Starting Annuity Income Trigger Higher Medicare Premiums?

This is one of the most overlooked consequences of adding retirement income—and it can cost you hundreds of dollars a year. Medicare Part B premiums are not the same for everyone. Higher earners pay what’s called an IRMAA surcharge (Income-Related Monthly Adjustment Amount). In 2025, the standard Medicare Part B premium was $185 per month, but IRMAA surcharges kicked in for individuals earning more than $106,000 (or couples earning more than $212,000) based on your tax return from two years prior.

That two-year lookback is critical. If turning on annuity income in 2026 pushes your 2026 adjusted gross income above an IRMAA threshold, you could face higher Medicare Part B (and Part D) premiums in 2028. The jump isn’t trivial—it can add $600 to over $4,000 per year depending on which income bracket you land in. If you’re hovering near a threshold, it may be worth talking with a tax advisor about spreading income or using other strategies (like qualified charitable distributions from an IRA) to manage your adjusted gross income.

How Do You Actually Decide Whether to Start Annuity Income Now?

Here’s a practical checklist to work through before you make the call:

1. Map your current income. Add up Social Security (if you’re already claiming), pension payments, RMDs, part-time work, and any other income. See where you stand before layering in annuity payments.

2. Run the tax scenario. Use last year’s tax return as a baseline. Add your projected annuity payments and see how much more of your Social Security becomes taxable—and whether you cross any IRMAA thresholds.

3. Check your contract terms. Some annuity income riders have “sweet spot” ages for activation—waiting an extra year or two might meaningfully increase your guaranteed payment. Read the rider carefully or ask your annuity carrier directly.

4. Consider your cash flow needs. If you genuinely need the income right now to cover living expenses, the theoretical tax optimization matters less. A guaranteed income stream that pays your bills is doing its job.

5. Get a second opinion. Annuity contracts are notoriously complex. A fee-only financial advisor (one who doesn’t earn a commission on your decision) can model out the scenarios specific to your contract and tax situation.

When Should You Delay the Income Switch?

Delaying makes sense if: you don’t need the cash flow yet, your income rider grows meaningfully for each year you wait, you’re approaching a year when RMDs will be unusually large (making additional income especially costly), or you’re close to an IRMAA income cliff. It also makes sense to delay if you’re still deciding whether to claim Social Security—coordinating both income streams at once gives you more control over your tax picture.

Delaying does not make sense if your annuity contract has a deadline for income activation, if your health situation makes a shorter payout period a realistic concern, or if the income is the difference between comfortable and stressful retirement living.

The bottom line: the annuity income switch isn’t a set-it-and-forget-it moment—it’s a lever in a larger system. Pull it at the right time, and it clicks into place beautifully. Pull it at the wrong time, and it can quietly cost you thousands in unnecessary taxes and Medicare surcharges over the years ahead.

Frequently Asked Questions

Frequently Asked Questions

When should I claim Social Security to maximize my benefit?

The longer you wait to claim Social Security—up to age 70—the higher your monthly benefit, growing roughly 8% per year past your full retirement age. If you’re in good health and have other income sources like an annuity or pension to bridge the gap, delaying often results in significantly more lifetime income. Run a break-even analysis to see at what age the higher payments outpace what you would have collected by claiming earlier.

How much of my Social Security benefit is taxable?

Between 0% and 85% of your Social Security benefit may be taxable, depending on your combined income (adjusted gross income plus nontaxable interest plus half your Social Security). If that combined figure exceeds $34,000 for single filers or $44,000 for married couples filing jointly, up to 85% of your benefit is subject to federal income tax. Adding annuity income can push you into higher taxation, so it’s worth modeling before you activate payments.

What are the RMD rules for 2025 and 2026?

As of 2026, required minimum distributions from traditional IRAs and most 401(k)s must begin at age 73. Your annual RMD is calculated by dividing your prior December 31 account balance by an IRS life expectancy factor. If your annuity is held inside a qualified retirement account, its value counts toward the RMD calculation—and annuitizing it may satisfy your RMD requirement for the year.

How do I avoid Medicare IRMAA surcharges?

IRMAA surcharges apply when your modified adjusted gross income—based on your tax return from two years prior—exceeds certain thresholds (starting at $106,000 for individuals in 2025). To avoid or minimize surcharges, strategies include managing the timing of large income events like annuity activation, making qualified charitable distributions from your IRA to reduce taxable income, or using a Roth conversion in lower-income years. If your income drops significantly, you can also appeal your IRMAA status using IRS Form SSA-44.

What is the Medicare Part B premium for 2025?

The standard Medicare Part B premium for 2025 was $185 per month for most enrollees. However, higher-income beneficiaries pay more through IRMAA surcharges, which can push Part B costs to $628.90 per month or more at the highest income tiers. Part D (prescription drug coverage) premiums are also subject to IRMAA adjustments based on the same income thresholds.