The annuity can be identical. The taxes on each check are not.
With IRA or 401(k) money (qualified)
- Every payment is taxable as ordinary income, because the money was never taxed going in.
- Move it directly. A direct (trustee-to-trustee) transfer or rollover into an IRA annuity avoids withholding and penalties. Taking a check yourself starts a 60-day clock.
- Required minimum distributions. Payments from an annuity held in an IRA can generally count toward the RMD for that IRA.
With savings (non-qualified)
- Part of each payment is tax-free — the return of money you already paid tax on — using the IRS exclusion ratio.
- Once you’ve recovered your full investment, later payments are fully taxable.
- See a worked example.
Roth money
Qualified Roth distributions are generally tax-free, and Roth IRAs have no RMDs for the original owner — so many people prefer to spend other money first. Ask your tax professional.
All our estimates are shown before tax. Your actual after-tax income depends on where the money comes from and your tax situation.
General information, not tax advice. Your tax professional can tell you how this applies to you.
