Annuity Payout Calculator

Annuity Payout Calculator
An annuity payout calculator helps estimate how much an annuity will pay over a fixed period or determine how long an annuity will last if withdrawals are made at a set amount. If you’re looking to estimate the final balance of an annuity during the accumulation phase, consider using our Annuity Calculator.

Qualified vs. Non-Qualified Annuities

Qualified Annuities
In the United States, a qualified annuity is part of a tax-advantaged retirement plan, such as an IRA or 401(k). Other less common plans include defined benefit pension plans, 403(b) plans, Keogh Plans, Thrift Savings Plans (TSPs), and Simplified Employee Pensions (SEPs).

Contributions to qualified annuities are typically made with pre-tax dollars, meaning the money invested is not taxed in the year it is contributed. This provides a tax deduction, lowering taxable income. However, once withdrawals begin, the distributions are subject to ordinary income tax.

Since qualified annuities are used for retirement savings, they follow specific tax rules and penalties. The governing plan dictates withdrawal conditions, but unique annuity features—such as guaranteed death benefits ensuring payouts to beneficiaries even in declining markets—may still apply.

Non-Qualified Annuities
Non-qualified annuities are purchased with after-tax dollars, meaning taxes have already been paid on the principal. As a result, only the earnings portion of a non-qualified annuity is taxed upon withdrawal. Unlike qualified annuities, non-qualified annuities are not subject to required minimum distributions (RMDs) at age 72. There are also no limits on how much money can be placed into a non-qualified annuity or how many annuities an individual can own.

Early Withdrawals
If funds are withdrawn from an annuity before age 59½, a 10% early withdrawal penalty is applied in addition to regular income tax.

For all annuities, earnings grow tax-deferred and are taxed only upon withdrawal. Under the last in, first out (LIFO) taxation rule for non-qualified annuities purchased after August 13, 1982, earnings are withdrawn before the principal, making early distributions fully taxable until the earnings are depleted.

However, there are exceptions to early withdrawal penalties. Many annuity contracts allow a portion of the balance to be withdrawn each year without a penalty. Other contracts permit penalty-free withdrawals of the gains (but not the principal). Additionally, penalty-free early withdrawals may be allowed in cases such as disability, terminal illness, major medical emergencies, or long-term care needs.

Phases of an Annuity
An annuity progresses through three key phases: accumulation, annuitization, and payout.

Accumulation Phase
The accumulation phase is the period when the annuity builds cash value. This phase begins after the initial investment is made. Contributions can be made as a lump sum or through periodic payments:

• Lump sum contributions are common for individuals near or in retirement who want immediate annuity payouts.

• Periodic contributions are ideal for younger investors looking to grow their annuity over time for future retirement income.

Even after the accumulation phase ends, the annuity can continue to increase in value. Whether fixed, indexed, or variable, annuities accumulate earnings tax-deferred until withdrawals begin.

1035 Exchange

A 1035 Exchange, named after the Internal Revenue Code (IRC) Section 1035, allows policyholders to transfer funds from one life insurance policy, annuity, or endowment to another without it being considered a taxable event.

This is beneficial for several reasons:

• It allows policyholders to adjust to changing economic conditions.

• Advancements in life expectancy and insurance costs can make newer annuity contracts more favorable.

• It helps individuals transition life insurance policies into annuities when income is a greater priority than a death benefit.

The IRS permits tax-free exchanges only in the following cases:

• An annuity contract exchanged for another annuity or one with long-term care benefits.

• A life insurance policy exchanged for another life insurance policy, endowment, or annuity.

• An endowment contract exchanged for another endowment or annuity.

A partial 1035 exchange allows only a portion of an annuity’s value to be transferred tax-free. However, to qualify, no distributions can be made from either contract within 180 days of the exchange, or the IRS may treat it as a taxable transaction.

Annuitization Phase
The annuitization phase is a one-time event marking the transition from accumulation to payout. At this point, the insurance company stops accepting contributions and begins distributing periodic payments based on the annuity’s balance. In the case of variable annuities, accumulated units are converted into annuity units.

Annuitization decisions are permanent, meaning once a payout option is chosen, it cannot be altered.

Payout Phase
During the payout phase (also known as the distribution phase), the insurance company disburses payments to the annuitant. The duration of the payouts depends on the payout option selected and the accumulated balance.

In non-qualified annuities, each payment consists of two portions:

• Principal – Withdrawals of the original investment are tax-free.

• Earnings – Taxed as ordinary income and withdrawn first.

Payout Options

• Lump-Sum Payment – The annuitant withdraws the entire balance at once. While this provides immediate access to funds, it may trigger significant taxes in the withdrawal year.

• Fixed-Length Payout – Also known as period certain payouts, this option guarantees payments for a predetermined number of years (e.g., 10, 15, or 20). If the annuitant dies before the period ends, beneficiaries receive the remaining payments.

• Fixed Payment Amount – The annuitant selects a fixed monthly payment. Payments continue until the balance is depleted. If the chosen amount is too high, funds may run out before death; if too low, money may remain unspent.

• Life-Only Payout – Payments continue for the lifetime of the annuitant. If the annuitant dies early, no residual balance is passed to beneficiaries. However, if they outlive their life expectancy, they may receive more than their annuity’s initial value.

• Joint and Survivor Payout – Payments continue for the lifetimes of both spouses. This ensures a surviving spouse receives income, but payments are generally lower than life-only options.

• Life with Period Certain – A combination of life-only and fixed-length options. The annuitant receives lifetime payments, but if they die within a preselected period (e.g., 10 years), payments continue to a beneficiary until the period ends.

Conclusion
Annuities provide a structured way to grow wealth and generate retirement income. Understanding the different phases and payout options ensures that individuals make informed decisions to align with their financial goals. Whether seeking guaranteed lifetime income, structured payments over time, or flexible withdrawal options, annuities offer valuable solutions for retirement planning.