Tax Truths Last reviewed: 2026-10-03 Part of Tax truths

SPIA Taxes: The Annuity Taxed Like a Pension

Written and reviewed by Hans Goldstein, licensed insurance producer, NPN 20602398 · CA Insurance License #4273294
Last reviewed October 3, 2026 · Published October 3, 2026

Short answer: a single premium immediate annuity bought with after-tax money is taxed under the exclusion ratio. Each payment is split into a return of your premium, which is not taxed, and earnings, which are ordinary income, until you have recovered your full basis (IRS Publication 939). That spreads the tax over your lifetime instead of putting the gain first, which is why a SPIA is taxed more like a pension than like a deferred annuity. A SPIA bought with IRA money is fully taxable.

Goldstein Take: How each annuity type is taxed on the way out

Goldstein Take · Hans's editorial verdict · reviewed Oct 3, 2026 · how we grade →

Option	Verdict	One-line take
Non-qualified SPIA	A-	Exclusion ratio: part of every payment is basis, not taxed, until basis is recovered.
Pension with after-tax contributions	B+	Similar idea: your after-tax contributions come back untaxed over the payments.
Non-qualified deferred annuity, withdrawals	C	Gain first (LIFO), all ordinary income, 10% penalty before 59½.
Qualified SPIA (from an IRA or 401(k))	C	No basis in most cases, so every payment is ordinary income, same as the IRA would have been.

Bottom line: If you want lifetime income from non-qualified (after-tax) savings, a SPIA's tax treatment is one of its quiet advantages. With IRA money the SPIA is taxed like any IRA withdrawal, so choose it for the income, not the tax.

Educational, not tax advice. Grades answer only the question in the title, for a typical case; your facts can change the answer.

Where annuities win

Lifetime income that can't stop. A SPIA, or an income rider or annuitization, pays as long as you live, backed by the claims-paying ability of the issuing insurer.
Less sequence-of-returns risk. Guaranteed or floored principal (MYGA, FIA) and a guaranteed income floor mean a bad market year early in retirement doesn't force you to sell low (why the first bad years matter most).
Inside an IRA or 401(k), the tax comparison is a wash. Every withdrawal from qualified money is ordinary income whether it sits in an annuity or a brokerage-style investment, and IRA assets get no step-up either way. The tax trap applies only to non-qualified (after-tax) money.

Use annuities for what they're great at, income and protection, not as a tax-efficient growth account. See current MYGA rates, SPIA rates, or get a free annuity review.

What the exclusion ratio is

When you annuitize after-tax money, the IRS treats each payment as part return of your investment and part income. The excluded part is a fixed percentage:

Exclusion ratio = investment in the contract / expected return

Investment in the contract is basically your premium (after-tax money).
Expected return is the total you are expected to receive. For a fixed-period annuity that is simply the payment times the number of payments. For a life annuity it is the yearly payment times a life expectancy multiple from the IRS actuarial tables in Publication 939.

The excluded percentage applies to every payment until you have recovered your whole basis. After that, for annuities starting after 1986, payments are fully taxable. If you die before recovering your basis, the unrecovered amount is generally deductible on your final return. These rules are in §72(b) and explained in Publication 575.

Free annuity review

What would a SPIA pay you, and how much of it is taxed?

Send your email and I'll send current SPIA quotes for your age with the taxable and non-taxable split, within one business day.

We’ll email it to you. Hans Goldstein · NPN 20602398.

Rather talk it through? Or book 15 minutes on Hans’s calendar.

A worked example

Hypothetical, not a quote and not tax advice. A 65-year-old puts $100,000 of after-tax savings into a life-only SPIA that pays $600 a month ($7,200 a year). The payout is an assumption for the math; check current SPIA rates for real quotes.

Hypothetical exclusion ratio for a non-qualified life-only SPIA

Step	Math	Result
Investment in the contract	Premium paid with after-tax money	$100,000
Expected return	$7,200 a year x 20.0 (IRS Table V multiple for age 65, 26 CFR 1.72-9 (Table V))	$144,000
Exclusion ratio	$100,000 / $144,000	69.4%
Not taxed each year	$7,200 x 69.4%	about $5,000
Taxable each year	$7,200 minus $5,000	about $2,200
Basis fully recovered	$100,000 / $5,000 a year	after about 20 years (age 85)
After that	Each payment fully taxable	$7,200 a year

Multiples depend on age, sex-neutral IRS tables, payout options (life only, period certain, joint) and the annuity start date. The insurer reports the taxable part on Form 1099-R. Have your CPA confirm before you rely on it.

Compare the same $7,200 a year taken as withdrawals from a deferred annuity with plenty of gain in it: under the gain-first rule, the whole $7,200 would be taxable until the gain ran out (the annuity tax trap). The SPIA taxes only about $2,200 of it a year in this example, for the first 20 years.

Qualified vs non-qualified SPIAs

Non-qualified (bought with after-tax money, including a §1035 exchange from a deferred annuity, which carries its basis over): exclusion ratio applies as above.
Qualified (bought inside an IRA, or with a rollover from a 401(k)): you usually have no basis, so every payment is ordinary income. The SPIA does not make IRA money more tax-efficient; it makes it last for life, and payments can count toward your required minimum distributions.

Why it is called “taxed like a pension”

A traditional pension paid from pre-tax contributions is fully taxable, but a pension that includes after-tax contributions returns them without tax over the payments under a similar method. A non-qualified SPIA works the same way: you get your own money back in level slices, and only the earnings part is taxed. That predictability helps with retirement tax planning, for example around Medicare premium brackets.

The trade-offs, stated once

It is irrevocable. A life-only SPIA trades the lump sum for income. There is no surrender value.
Life-only stops at death. Period-certain or cash-refund options protect heirs but pay less each month.
Fixed payments lose buying power to inflation unless you choose an increasing payout, which starts lower.
The payment depends on the insurer. CD vs SPIA walks through how the two compare.

SPIAs also tend to pay agents relatively low commissions, which is one reason they are not pushed as often as other annuities (annuity commissions).

Educational, not tax advice. Tax treatment depends on your facts and on current law, which can change. Run your own numbers with your CPA.

Thinking about turning savings into lifetime income?

Send your details. Within one business day you get real SPIA quotes for your age, the exclusion ratio on each, and how it compares with a MYGA ladder.

Educational review, not tax advice. Your CPA confirms the tax numbers.

Rather talk it through? Or book 15 minutes on Hans’s calendar, or call 213-414-2808.

Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer

Frequently asked questions

How is a SPIA taxed?

A SPIA bought with after-tax money is taxed under the exclusion ratio: part of each payment is a return of your premium, which is not taxed, and the rest is ordinary income, until your basis is fully recovered. A SPIA bought with IRA money is generally fully taxable.

How do you calculate the exclusion ratio?

Divide your investment in the contract (your after-tax premium) by the expected return. For a life annuity, the expected return is the yearly payment times a life expectancy multiple from the IRS tables in Publication 939.

What happens after I recover my basis in a SPIA?

For annuities starting after 1986, once your full basis has been recovered, each later payment is fully taxable as ordinary income.

What if I die before recovering my basis?

For annuities starting after 1986, the unrecovered basis is generally deductible on your final income tax return. Period-certain or refund options can also pay remaining amounts to a beneficiary.

Is a SPIA taxed better than a deferred annuity?

For income from after-tax money, usually yes. Deferred annuity withdrawals are taxed gain first, while a SPIA spreads the taxable part evenly across payments. Your CPA should confirm for your situation.

Sources

Hans Goldstein, CA Insurance License #4273294 · NPN 20602398 · Goldstein & Co. LLC dba Goldstein Insurance Services, CA License #6016830

Contact: hans@hansgoldstein.com · 213-414-2808

General education, not tax or legal advice. Tax treatment depends on your facts and on current law, which can change. Talk to your CPA or estate attorney. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Guarantees apply only to the contractual terms of the policy. Caps, participation rates, loan rates, charges and dividends are not guaranteed and can change. Hans is paid a commission by the insurer if you buy a policy through him. For life insurance, ask and he will tell you what he earns on your specific policy. Product and company names are trademarks of their owners. Goldstein Insurance Services is an independent agency, not affiliated with or endorsed by any insurer named here. Commission ranges cited are from the public sources listed and vary by insurer, product, term, issue age and state. Annuities have surrender charges and other limitations; read the contract and disclosure before you buy.