Message Font: Serif | Sans-Serif
No. of Recommendations: 0
If you look closer at the quoted material is correct as it pertains to
"amounts received as loans or amounts received on surrenders "

"Taxation of Annuity Withdrawals and Distributions."

"For annuities purchased before August 14, 1982, the general rule regarding cash withdrawals, amounts received as loans or amounts received on surrenders is that they are tax free until they equal the contract owner’s basis or investment in the contract. After that, they are fully taxable as income. These annuities are given “first-in, first-out” (FIFO) treatment.

Annuities purchased on or after August 14, 1982, the general rule regarding these same kinds of distributions is that they will be treated first as fully taxable interest payments and only second as a recovery of non-taxable basis. These annuities are given “last-in, first-out” (LIFO) treatment."

However, these only pertain to the transactions described, for tax-deferred annuities, and not a "pure, actual" stream of payments, which is what annuities were origianlly designed to be, and what I understand the OPs questions are about. These are described in the first paragraph,

Taxation of Annuity Income
Income received from a nonqualified annuity under a structured annuitization option is taxed in accordance with the exclusion ratio. The exclusion ratio treats each annuity payment as part principal and part interest, thereby excluding a portion of each payment from tax and taxing a portion. The exclusion ratio is the “investment in the contract” (i.e., total premiums paid) divided by the “expected return” (i.e., total amounts to be received). If the expected return is not based on a life expectancy – as would be the case with a fixed term of years option, for example – it is calculated simply by adding the total amounts to be received. If the expected return is based on a life (or joint life) expectancy, certain IRS-prescribed tables and multipliers are used to determine the total expected return.

By the way, that other rule about the 3-yr. payback, where you get the cost up front, and then all income after that, you used to see that most commonly with US Government retirees. Today, it's pretty rare. Govt. retirees are mostly taxed on the regular exclusion-percentage basis, like others.

Also, the OP should be sure about the meaning of the phrase "term certain", when discussing annuities. Are we talking about an actual fixed term, or a guaranteed minimum term equivalent in the case of death? You sometimes see something written, "lifetime joint & several annuity, with 10-yr. term certain". That means if they die prematurely, the annuity will pay off at least 10 yrs. worth of payments as a death payout. The phrase gets used loosely sometimes.

Print the post  


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.