A non-qualified annuity bought with after-tax dollars is not fully taxable when it starts paying out — the part that returns your investment in the contract comes back tax-free. This tool applies the IRS Simplified Method to split each payment into its tax-free and taxable portions, and shows the year your basis is fully recovered.
Five typical non-qualified annuity setups, computed with the Simplified Method. ' 'Notice how a larger after-tax premium raises the tax-free ratio, while an older issue age ' 'shortens the recovery period and pushes the ratio up sharply.
| Scenario | After-tax premium | Monthly payment | Tax-free ratio | Tax-free / mo | Taxable / mo | Recovery period |
|---|---|---|---|---|---|---|
| Single, age 65 — start of payments | $100,000 | $700 | 54.9% | 384.62 | 315.38 | 21.7 yrs |
| Single, age 70 — larger contract | $150,000 | $1,100 | 64.9% | 714.29 | 385.71 | 17.5 yrs |
| Joint & survivor 65/63 | $200,000 | $1,250 | 51.6% | 645.16 | 604.84 | 25.8 yrs |
| Single, age 75 — smaller contract | $60,000 | $500 | 75.0% | 375.00 | 125.00 | 13.3 yrs |
| Single, age 80 — short payout | $40,000 | $380 | 87.7% | 333.33 | 46.67 | 10.0 yrs |
Every row above is produced by the same formula the calculator runs: tax-free portion = investment in contract ÷ anticipated payments from IRS Table 1 (single life) or Table 2 (joint & survivor). Taxable portion = gross payment − tax-free portion.
The general rule for non-qualified annuities is the exclusion ratio: ' investment in the contract divided by the expected return. That requires you to project every ' payment to the end of life, which most people cannot do from a statement. ' IRS Publication 939 gives a shortcut — the Simplified Method — for annuities that ' 'pay for a life or a fixed number of years and are funded by a qualified plan or a non-qualified ' 'contract with a cash refund or guaranteed period.
Add every after-tax dollar you paid in premiums, then subtract any amount you previously ' 'excluded from income (for example, if you annuitized part of the contract earlier). ' 'Employer contributions and pre-tax rollovers are not part of your basis.
Use the annuitant's age on the annuity starting date. Single-life annuities use Table 1; ' 'joint and survivor annuities use Table 2 with the combined ages.
tax-free portion per payment = investment in contract ÷ anticipated payments. '
'The result is fixed for the life of the contract — it never changes, even as the payment amount '
'does (for a variable or indexed annuity, the same dollar amount stays tax-free and everything '
'above it is taxable).
Once you have excluded an amount equal to your entire investment in the contract, the tax-free ' 'portion stops. Every payment after that point is fully taxable. If the annuitant dies before basis ' 'is recovered, the unrecovered amount is deductible on the final return — that is the "cash refund" ' 'feature that makes the Simplified Method apply.
| Age at start | Anticipated payments | Years |
|---|---|---|
| 55 | 360 | 30.0 |
| 60 | 310 | 25.8 |
| 65 | 260 | 21.7 |
| 70 | 210 | 17.5 |
| 75 | 160 | 13.3 |
| 80 | 120 | 10.0 |
| 85 | 90 | 7.5 |
| 90 | 70 | 5.8 |
| Younger spouse age | Anticipated payments | Years |
|---|---|---|
| 55 | 400 | 33.3 |
| 60 | 360 | 30.0 |
| 65 | 310 | 25.8 |
| 70 | 260 | 21.7 |
| 75 | 220 | 18.3 |
| 80 | 180 | 15.0 |
| 85 | 150 | 12.5 |
| 90 | 120 | 10.0 |
Tables show representative ages. IRS Pub 939 Table 1 runs from age 5 to 100 ' 'in single-year steps; this calculator interpolates to the nearest listed age. ' 'For exact figures, use the published table.
An annuity payout quote tells you the monthly cheque. It says nothing about how much of that ' cheque the IRS treats as income. Two retirees with the same $1,000 monthly payment can face very ' 'different tax bills: one who annuitized $200,000 of after-tax money at 65 excludes roughly ' '$769 of each payment, while one who rolled $200,000 from a pre-tax 401(k) excludes ' 'nothing and owes ordinary income tax on the entire $1,000.
That difference is worth thousands of dollars a year, and it is the single most common ' 'misunderstanding when people compare a lump sum to an annuity. Before you sign an annuitization ' 'election, run the after-tax comparison — not just the gross payout comparison.
Tax deferral inside an annuity is only worth what it costs. A typical variable annuity carries a ' 'mortality and expense charge near 1.25% plus underlying fund expenses, and riders ' 'can push the all-in cost past 2.5% a year. Against a low-cost index fund at ' '0.05%, that drag compounds: over 20 years the difference in ending balance on a ' '$200,000 contract is roughly a third of the account.
The exclusion ratio does not fix that. It only governs how the payout is taxed, not how ' 'the money grew. If you are annuitizing a contract you already own, the ratio is your tax answer. ' 'If you are deciding whether to buy one, compare the annuity fee drag against the tax deferral first — ' 'and run the fee cost separately before you model the payout.
This tool is built for three situations:
If your annuity is inside an IRA or a 401(k), do not use this page — those payments are fully ' 'taxable as ordinary income, and the exclusion ratio is zero. Use the RMD calculator instead.
⚠️ Disclaimer: This calculator implements the IRS Simplified Method from Publication 939 using representative anticipated-payment tables. It is an estimate for planning, not tax advice. Actual exclusion amounts depend on the contract, the annuity starting date, and the exact published table figures — confirm against your Form 1099-R or a tax professional before filing.