How Are Monthly Life Annuity Benefit Payments Treated?

Shawn Plummer

CEO, The Annuity Expert

All monthly payments are taxed as ordinary income. If the annuity is a qualified plan, all of the monthly income payments will be subject to taxes. Only the interest will be taxed if the annuity is a non-qualified plan. If the annuity is a Roth IRA, payments will be tax-free.

Taxes On Monthly Life Annuity Benefit Payments

Qualified AnnuityRoth AnnuityNon-Qualified Annuity
Funded WithPre-taxed MoneyAfter-Tax MoneyAfter-Tax Money
Withdrawals100% TaxableTax-FreeInterest-Only Taxed (LIFO)
Annuitized Payments100% TaxableTax-FreeExclusion Ratio
RMDsYes at Age 72NoNo
Contribution LimitYesYesNo

Qualified Annuity Benefit Payments

All monthly withdrawals and payments from a qualified annuity (IRA Annuity) are taxed as regular income. All withdrawals from a Roth IRA Annuity are income tax-free.

Non-Qualified Annuity Benefit Withdrawals

There are no taxes on the principal when money is taken via a penalty-free withdrawal or lifetime withdrawals from a non-qualified annuity. Owners have to pay taxes only if there are earnings and interest. You will follow the “last-in-first-out” (LIFO) protocol of the IRS if it’s a non-qualified annuity withdrawal.

Last-In-First-Out (LIFO) means any taxable earnings and interest is distributed to the annuity holder first. Once the interest and earnings are depleted, there are no taxes due.

  • Traditional Withdrawals = Last-In, First-Out
  • Penalty-Free Withdrawals = Last-In, First-Out
  • Lifetime Income Payments (Income Rider) = Last-In, First-Out

Non-Qualified Annuity Benefit Annuitized Payments

The IRS calculates how much of an annuitized annuity withdrawal is taxable. This calculation is called the exclusion ratio. This ratio calculation is based on the length of the annuity, the principal, and the earnings.

If a non-qualified annuity is set up to pay the owner annuitized annuity payments for their entire life, the exclusion ratio will consider their life expectancy. If they live longer than their calculated life expectancy, all annuity payments beyond that time period are taxed as income.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

Scroll to Top