How Much Tax Will You Pay on Your Annuity?
This annuity tax calculator estimates the federal and state tax on a withdrawal, a full cash-out or a stream of annuity income. Only the growth is taxed, and it is taxed as ordinary income, not as capital gains. The money you paid in with after-tax dollars comes back tax free (IRS Publication 575).
- Non-qualified annuity: you pay tax on the gains only.
- Qualified annuity (IRA, 401(k), 403(b) money): every dollar is taxable, because the money went in before tax.
- Before age 59½: the IRS adds a 10% penalty to the taxable part.
How to Use the Annuity Tax Calculator
- Pick how you are taking the money. Choose a partial withdrawal, a full cash-out, lifetime income or income for a set number of years.
- Enter what you paid in and what the contract is worth. Your annual statement shows both. Qualified annuities skip the “paid in” step.
- Add your other taxable income and filing status. The calculator works out the extra tax this money adds on top of what you already owe, using 2026 brackets and deductions.
How Are Annuity Withdrawals Taxed?
Withdrawals from a non-qualified annuity come out gains first. The IRS calls this the last-in, first-out (LIFO) rule, and it sits in Internal Revenue Code Section 72(e).
- Example: you paid $100,000 and the annuity is worth $150,000.
- The first $50,000 you withdraw is fully taxable.
- Everything after that is your own principal coming back tax free.
See a real case in how annuity withdrawals are taxed, a real case where spreading withdrawals cut taxable income by $35,000.
How Is Annuity Income Taxed?
Annuity income payments are split into a tax-free part and a taxable part using the exclusion ratio. The ratio is what you paid in divided by the total you are expected to receive (IRS Publication 939).
- Lifetime income: expected return = yearly income times the IRS life expectancy multiple for your age (Table V). At 65 the multiple is 20.0.
- Income for a set period: expected return = yearly income times the number of years.
- Once you have recovered your principal, lifetime payments become fully taxable.
Our exclusion ratio guide walks through the math line by line. To see what a lifetime payment would be, try the immediate annuity calculator.
See what a SPIA would pay you for life
SPIA payouts depend on your age, your premium and the payout option you pick. Estimate it in our immediate annuity calculator, or request a quote with current carrier figures for your age and state, in writing.
How Much Federal Tax Should You Withhold From an Annuity?
Insurers withhold 10% for federal tax on a withdrawal or cash-out unless you choose a different amount on IRS Form W-4R. Regular income payments are withheld like a paycheck, based on Form W-4P.
- 10% is often too little. If the calculator shows a top bracket of 22% or more, withhold closer to that rate or make an estimated payment.
- You can choose 0% to 100% on a withdrawal.
Check where your income lands in the 2026 tax brackets for retirees.
How Can You Lower the Tax on an Annuity?
- Spread withdrawals over several years. Smaller amounts keep more of the gain in the 10% and 12% brackets.
- Exchange instead of cashing out. A Section 1035 exchange moves the money to a new annuity with no tax due.
- Turn it into income. The exclusion ratio spreads the tax over many years instead of one.
- Wait until 59½ to avoid the 10% penalty.
If your annuity’s guaranteed period is ending, a 1035 exchange into a new MYGA keeps the tax deferred. Compare today’s fixed annuity rates before you cash out. For the full rules, start with are annuities taxable. Run your own numbers in the annuity tax calculator above before you take money out.
Lock in today's MYGA rate before it moves
Your rate is set by your application date, not the day rates change. Request a quote and we will confirm current rates for your state and premium, in writing, so you can decide before the market moves.
Frequently Asked Questions
Are annuity gains taxed as capital gains?
No. Annuity gains are taxed as ordinary income at your regular federal bracket, even if the annuity was linked to a stock index. Capital gains rates never apply to annuity earnings.
Does the annuity tax calculator include state tax?
Yes, as a flat estimate. Enter your state’s income tax rate, or 0 if your state has no income tax. Some states exempt part of retirement income, so check the list of states that don’t tax retirement income.
Can annuity income make my Social Security taxable?
Yes. Taxable annuity income raises your combined income, which can make up to 85% of your Social Security benefits taxable. Check yours with the Social Security taxable benefits calculator.
How are inherited annuities taxed?
The beneficiary pays ordinary income tax on the gains, just as the owner would have. The payout option they pick decides how fast that tax comes due. See our guide to annuity beneficiary rules.
