Annuity Tax Calculator: What You Owe When You Take Money Out

Short answer: annuity money you take out is taxed as ordinary income, not capital gain. From a non-qualified annuity, a withdrawal is taxed gain first; annuitized payments are split by the exclusion ratio; a 1035 exchange is not taxed at all. Before 59 1/2, add a 10% additional tax. Enter your contract below to see your number.

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How annuity withdrawals are taxed

Two questions decide the tax: what kind of money went in, and how it comes out.

Non-qualified annuity (bought with money you already paid tax on). Your cost basis comes back tax free; only the growth is taxed. But the order matters. A withdrawal taken before you annuitize is treated as gain first (last in, first out): it is fully taxable until the contract's value no longer exceeds your basis (IRC 72(e)(2)(B) and (e)(3)). The gain is measured on the contract's cash value without the surrender charge. Money invested before August 14, 1982 follows the older basis-first rule.

Qualified annuity (held in an IRA, 401(k), 403(b) or other plan). The money went in before tax, so withdrawals are usually fully taxable. If you have after-tax money in the plan, each withdrawal carries a pro rata share of it tax free (IRC 72(e)(8); for IRAs, Form 8606 adds up all your IRAs).

Annuitized payments and the exclusion ratio

Turn a non-qualified annuity into payments for life and each payment is part taxable income, part your own money back. The tax-free share is the exclusion ratio: investment in the contract divided by the expected return (IRC 72(b)). For one life, expected return is the yearly payment times the Table V multiple for your age at the start (Treas. Reg. 1.72-9, Table V, read October 13, 2026): 25.9 at 58, 22.5 at 62, 20.0 at 65, 16.0 at 70. After you have recovered your full investment, every payment is fully taxable (IRC 72(b)(2)). The calculator leaves out the small payment-timing adjustment in Treas. Reg. 1.72-5(a)(2), so your 1099-R can differ by a little. For the payment-by-payment math alone, use the annuity exclusion ratio calculator.

Payments from a qualified plan annuity with after-tax money use the simplified method instead: your basis divided by a set number of monthly payments by age at the start, 360 at 55 or under, 310 at 56 to 60, 260 at 61 to 65, 210 at 66 to 70 and 160 over 70 (IRC 72(d)(1)(B)(iii); IRS Publication 575).

The 10% additional tax before 59 1/2

Take a taxable amount out before age 59 1/2 and you owe an extra 10% of the taxable part on top of income tax: IRC 72(q) for non-qualified annuities, IRC 72(t) for qualified ones. The main exceptions are death, disability, a series of substantially equal periodic payments for life, and payments from an immediate annuity. The tax-free return of your basis is never hit with it. It is not the same thing as the insurance company's surrender charge; see the annuity surrender charge calculator for that.

1035 exchange: moving to a new annuity without tax

Exchange one annuity directly for another and no tax is due (IRC 1035(a)(3)). Your cost basis carries over to the new contract, so the gain is still there, just still deferred. Cash you take out along the way is taxable up to your gain. If you split an annuity with a partial exchange, avoid taking money out of either contract for 180 days, or the IRS can treat the exchange as a taxable withdrawal (Rev. Proc. 2011-38). Timing a move around a surrender schedule? Use the 1035 exchange timing calculator.

The 3.8% tax and your state

The taxable part of a non-qualified annuity is net investment income. The 3.8% tax applies to the smaller of that income or the amount your modified adjusted gross income is over $250,000 (married filing jointly) or $200,000 (single); those thresholds are set in the statute and are not indexed (IRC 1411). Qualified plan and IRA distributions are not net investment income. Most states tax annuity income as ordinary income; enter your state's rate on this money, or 0 if your state has no income tax.

A worked example (2026, computed by this calculator)

A married couple, the owner is 58, has a non-qualified annuity worth $300,000 with a $200,000 cost basis ($100,000 of gain). Their other income is $110,000 and their state taxes this income at 5%.

• Withdraw $50,000: all $50,000 is taxable, because gain comes out first. Federal income tax $8,700, the 10% additional tax $5,000, state $2,500. Total $16,200; they keep $33,800.
• Cash out the whole contract: only the $100,000 of gain is taxable. Federal $19,700, 10% additional tax $10,000, state $5,000: total $34,700.
• Annuitize for $18,000 a year for life: Table V multiple 25.9, expected return $466,200, exclusion ratio 42.9%. Each year $7,722 is tax free and $10,278 is taxable: $1,747 of tax a year, no 10% (payments for life are an exception). The tax-free part lasts about 25.9 years.
• 1035 exchange: $0 tax; the $200,000 basis moves to the new annuity.

The same $50,000 withdrawal from a qualified annuity with no after-tax money costs $16,200 too: fully taxable either way, but here because the money went in before tax. Change any number above and every line updates.

What this calculator leaves out

One contract, one tax year, 2026 federal tables. It treats your other income as ordinary income taken with the standard deduction (including the 65 and older amounts and the $6,000 senior deduction for 2025 to 2028, phased out above $75,000 single or $150,000 joint, per P.L. 119-21 section 70103). It does not model itemized deductions, capital gains in your other income, Social Security taxation, the aggregation of contracts bought from the same company in the same year (IRC 72(e)(12)), joint life or refund features on annuitized payments, inherited annuities (see the inherited annuity tax calculator), or required minimum distributions.

Sources

• Rev. Proc. 2025-32: 2026 brackets, standard deduction and 65 and older amounts.
• IRC 72: exclusion ratio (b), simplified method (d), withdrawals and LIFO (e), 10% additional tax (q) and (t). Statute as in force October 2026.
• Treas. Reg. 1.72-9, Table V: expected return multiples, one life.
• IRC 1035 and Rev. Proc. 2011-38: tax-free exchanges and partial exchanges.
• IRC 1411: 3.8% net investment income tax.
• IRS Publication 575 and IRS Publication 939: pension and annuity income, the general rule.

Questions about annuity taxes

Q: How is an annuity withdrawal taxed?
A: From a non-qualified annuity (bought with after-tax money), a withdrawal before you annuitize is taxed gain first: every dollar is taxable until all the growth is out, and only then do you get your own money back tax free (IRC 72(e)(2)(B) and (e)(3)). From a qualified annuity (inside an IRA, 401(k) or 403(b)), the withdrawal is usually fully taxable because the money went in before tax. Either way it is ordinary income, not capital gain.

Q: What is the exclusion ratio on annuity payments?
A: When you annuitize a non-qualified annuity, part of each payment is your own money coming back. The exclusion ratio is your investment in the contract divided by the expected return (IRC 72(b)). For a single life annuity, the expected return is the yearly payment times the Table V multiple for your age (Treas. Reg. 1.72-9): 25.9 at 58, 20.0 at 65, 16.0 at 70. Once you have recovered your whole investment, every later payment is fully taxable (IRC 72(b)(2)).

Q: Is there a penalty for taking money out of an annuity before 59 1/2?
A: Yes, a 10% additional tax on the taxable part: IRC 72(q) for non-qualified annuities and IRC 72(t) for qualified ones. It does not apply after death, on disability, to substantially equal periodic payments for life, or to payments from an immediate annuity (IRC 72(q)(2)). It is separate from any surrender charge the insurance company keeps.

Q: Is a 1035 exchange taxable?
A: No, if it is done as a direct exchange of one annuity for another (IRC 1035(a)(3)). Your cost basis carries to the new contract and no 1099-R tax is due. Cash you take out of the exchange is taxable up to your gain. A partial exchange followed by a withdrawal within 180 days can be recast as taxable (Rev. Proc. 2011-38).

Q: Does the 3.8% net investment income tax apply to annuities?
A: To non-qualified annuities, yes: the taxable part of a withdrawal or payment is net investment income (IRC 1411(c)(1)(A); Treas. Reg. 1.1411-1(d)(4)). It applies only to the extent your modified adjusted gross income is over $250,000 married filing jointly or $200,000 single; those amounts are fixed by statute and not indexed. Distributions from qualified plans and IRAs are not net investment income (IRC 1411(c)(5)).

Q: Is annuity income taxed as capital gains?
A: No. Annuity gain is taxed as ordinary income at your regular 2026 bracket (10% to 37%, Rev. Proc. 2025-32), never at the 0%, 15% or 20% capital gain rates. That is the trade for the years of tax deferral.

Q: Do I pay tax on an annuity if I cash it out at a loss?
A: No income tax is due when the cash you receive is less than your investment in the contract. Whether the loss on a non-qualified annuity surrender is deductible depends on how it is treated on your return; ask a tax professional before you count on it.

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Disclosure

This calculator is for educational and illustrative purposes only and is not a personalized recommendation, solicitation, or offer of any specific product. Outputs are approximations using publicly available rates, IRS tables, and standard payout factors as of 2026; actual carrier illustrations may differ. Annuity rates, caps, payout factors, surrender schedules, and tax brackets change frequently. Always confirm current values against the most recent carrier disclosure document, IRS Publications 575, 590-B and 939, and the actual contract before purchasing. Hans Goldstein is an independent licensed insurance producer (NPN 20602398) appointed with multiple A-rated carriers. Tax discussion reflects federal law as of 2026 and is subject to change. Consult a CPA and licensed advisor before acting on any output shown.