The Annuity Exclusion Ratio: Why a US SPIA Is Tax-Favored When You Live Abroad
Written by Hans Goldstein, licensed insurance agent · CA 4273294Short answer: on a non-qualified US immediate annuity, the IRS treats part of every payment as your own premium coming back untaxed (IRC §72(b)). In a $300,000 life-only example at 65 paying $22,500 a year, about $15,000 a year is untaxed and $7,500 is taxable for roughly 20 years; at 62 about $13,330 a year is untaxed for 22.5 years, single man or single woman. A US annuity also avoids the traps of foreign products: it is not a PFIC, not reportable on FBAR or Form 8938, and carries no 1% foreign-insurer excise tax.
Free guide: Moving abroad on a fixed income
Income rules and taxes by country: Norway, Switzerland, Sweden, Italy, Spain, Malta and more, plus how a lifetime annuity fits.
Americans keep paying US tax wherever they live. So when my parents started planning their move from the US to Norway, part of the question was how the US would tax income they lived on abroad. A US single premium immediate annuity (SPIA) bought with after-tax savings turned out to be one of the most tax-friendly ways to create that income on the US side. Here is why.
How the exclusion ratio works
Each payment from a non-qualified annuity is split in two (IRC §72(b), IRS Publication 939, the "General Rule"):
- a non-taxable return of your premium (your "investment in the contract"), and
- a taxable part, taxed as ordinary income.
The untaxed share is the exclusion ratio: your premium divided by the expected return. For a life annuity, expected return is the yearly payment times a life-expectancy multiple from the IRS tables in Publication 939 (Table V for this kind of contract).
Worked example: $300,000 at age 65
This example uses an assumed 7.5% payout rate to keep the math round. It is illustrative, not a quote. The Table V multiple at 65 is 20.0 (IRS Publication 939, December 2025 revision). Use your age at the birthday nearest the annuity starting date; monthly payments need no adjustment to the multiple, while quarterly, semiannual or annual payments do.
| Item | Amount |
|---|---|
| Premium, life-only, age 65 | $300,000 |
| Payout (assumed 7.5%) | $1,875 a month, $22,500 a year |
| Expected return | $22,500 x 20.0 = $450,000 |
| Exclusion ratio | $300,000 / $450,000 = 66.7% |
| Tax-free each year | $15,000 |
| Taxable each year | $7,500 |
| Federal tax at a 12% / 22% bracket | About $900 / $1,650 a year on $22,500 of cash flow |
The same math with a real survey figure: the September 9, 2026 ImmediateAnnuities.com survey shows an average of $639 a month per $100,000 for a 65-year-old man, life-only (7.67% a year). On $300,000 that is about $1,917 a month or $23,004 a year. Expected return is about $460,080, so roughly 65% of each check (about $15,000 a year) comes back untaxed and about $8,000 is taxable. Your own quote will differ.
Example at 62: single man, single woman and a couple
$300,000 at 62, life-only. Payouts are survey averages per $100,000 from the September 9, 2026 ImmediateAnnuities.com survey: man $603 a month, woman $582. The IRS multiples come from Publication 939: Table V (one life) is 22.5 at 62, and Table VI (joint and last survivor) is 27.8 when both spouses are 62. The tables are unisex, so the excluded dollar amount is the same for a man and a woman. Illustrative, not quotes.
| Single man, 62 | Single woman, 62 | Couple, both 62, joint and survivor | |
|---|---|---|---|
| Annual payment | $21,708 | $20,952 | Lower than single life; get a quote |
| IRS multiple | 22.5 (Table V) | 22.5 (Table V) | 27.8 (Table VI) |
| Tax-free each year | About $13,330 | About $13,330 | About $10,790 |
| Taxable each year | About $8,370 | About $7,620 | Payment minus about $10,790 |
| Years until the premium is recovered | About 22.5 (to about 84) | About 22.5 | About 27.8, and the survivor keeps the same exclusion percentage |
At 62 the 10% early-distribution tax is no longer an issue, and Social Security can start the same year. A couple that wants income to last for both lives trades a smaller check for that security, and the IRS spreads the excluded part over the longer two-life multiple.
In the same boat? Let’s run your numbers
See roughly what a lifetime annuity would cost to close your income gap, then get my personal read by email. I can help while you still live in the US.
Estimates use the September 9, 2026 ImmediateAnnuities.com payout survey (life only) and a 15% cushion. Illustrative, not a quote.
What happens later
- After you recover your premium (about 20 years in the example, around age 85), every payment is fully taxable (§72(b)(2)).
- If you die before recovering it, the unrecovered premium is deductible on your final return (§72(b)(3)).
To try your own numbers, use the annuity exclusion ratio calculator.
IRA money is different
If you buy the annuity inside an IRA, there is no after-tax basis (unless you made nondeductible contributions), so every payment is ordinary income. The upside: annuity payments from an IRA annuity satisfy the required minimum distributions for that IRA. Qualified plan distributions are also not net investment income for the 3.8% NIIT.
Why a US annuity beats foreign products for an American
| Issue | US annuity from a US insurer | European fund or foreign insurance contract |
|---|---|---|
| PFIC rules (Form 8621, punitive default tax) | Not a PFIC | Most European funds and ETFs are PFICs |
| 1% federal excise on premiums to a foreign insurer (§4371) | None | Applies unless a treaty exemption fits |
| FBAR and Form 8938 | Not reportable | Foreign cash-value contracts are reportable on both |
| US tax status of the contract | Standard §72 treatment | Case-by-case risk |
Three US rules that surprise people abroad
- The foreign earned income exclusion does not apply. §911(b)(1)(B)(i) excludes pensions and annuities, so Form 2555 cannot shelter annuity income.
- NIIT. The taxable part of a non-qualified annuity is net investment income for the 3.8% tax once modified AGI passes $200,000 single or $250,000 joint. Foreign tax credits do not offset NIIT (Toulouse v. Commissioner, 157 T.C. 49 (2021); the Federal Circuit reached the same result under the US-France treaty in Christensen v. United States, decided August 31, 2026). Most annuity retirees are under those thresholds.
- Withholding. Under IRC §3405(e)(13) and Treasury regulation §31.3405(e)-1 (T.D. 10008, which applies to payments from January 1, 2026), a US citizen whose residence address on file with the insurer is outside the US cannot opt out of federal income tax withholding, even if the payments go to a US bank account. Only the taxable part of each payment is withheld on, and the withholding is a prepayment credited on your US return, not an extra tax.
Retiring abroad before 59½
A non-qualified SPIA bought with a single premium that starts paying within a year is an "immediate annuity," and its payments are exempt from the 10% early-distribution tax even before 59½. For IRA money, a lifetime annuity counts as a series of substantially equal periodic payments. Details in moving abroad before 59½.
State tax: leaving California
- California taxes residents on worldwide income and gives no credit for foreign taxes, so a clean residency exit matters when you move to Europe.
- Federal law (4 U.S.C. §114) bars states from taxing nonresidents on retirement income from IRAs and qualified plans.
- A personally bought non-qualified annuity is not on the §114 list; it relies on ordinary sourcing rules for nonresidents. Ask a California tax professional to confirm your exit plan.
The trade-off, once
A life-only SPIA is irreversible and its payments are level unless you add a cost-of-living rider. In return you get lifetime income that is mostly untaxed on the US side for years, clean US reporting, and the kind of income residence permits count. If you are in the same boat as my parents, run your numbers with the calculator on this page.
Frequently asked questions
Related reading
- Moving abroad on a fixed income: hub
- How European countries tax a US annuity
- FBAR, FATCA and double taxation on a US annuity
- Moving abroad before 59 1/2 without the 10% penalty
- Annuity exclusion ratio calculator
- Immediate annuity calculator
Sources
- 26 U.S.C. section 72: annuities, exclusion ratio and early-distribution rules
- IRS Publication 939: General Rule for Pensions and Annuities
- IRS Publication 575: Pension and Annuity Income
- 26 U.S.C. section 4371: excise tax on policies issued by foreign insurers
- IRS: Comparison of Form 8938 and FBAR requirements
- 26 U.S.C. section 3405: withholding, (e)(13) payments delivered outside the US
- T.D. 10008: final regulations, residence address controls withholding from January 1, 2026
- 26 U.S.C. section 911(b)(1)(B)(i): pensions and annuities are not foreign earned income
- Christensen v. United States, Fed. Cir. No. 2024-1284 (August 31, 2026): no treaty credit against NIIT
- 4 U.S.C. section 114: no state tax on nonresidents' retirement income
- ImmediateAnnuities.com: immediate annuity rates by age (survey of September 9, 2026)
Goldstein & Co. LLC dba Goldstein Insurance Services · Hans Goldstein, licensed insurance agent, CA lic. #4273294 · NPN 20602398 · 213-414-2808 · hans@hansgoldstein.com
Education, not tax, legal or immigration advice. Rules, thresholds and exchange rates change; confirm with the consulate or immigration authority and a local tax adviser before you act, and get answers in writing. Hans Goldstein is a licensed insurance agent (CA 4273294) and can only offer annuities to residents of states where he is licensed. Annuity payments are guaranteed by the issuing insurer’s claims-paying ability, not by any government. Payout figures are illustrations from a published survey, not quotes. Immediate annuities are generally irrevocable.