Annuity Calculator

Worked example: $200,000 paid monthly for 20 years at 5%. The monthly rate is 0.05 ÷ 12 and there are 240 payments, so $1 a month is worth [1 − (1 + 0.05/12)⁻²⁴⁰] ÷ (0.05/12) = 151.5253 today. The payment is $200,000 ÷ 151.5253 = $1,319.91 a month, $316,779 in all, of which $116,779 is interest. Paid at the start of each month instead, the same premium gives $1,314.43.

With monthly or quarterly payments that rise once a year, the calculator values each year's payments as a level annuity and applies the growing annuity formula across the years, using one year of compounding at the period rate, (1 + i)¹² for monthly payments, in place of 1 + r. With a 2% yearly increase, the example starts at $1,122.41 a month and ends at $1,635.14 in year 20.

Under the General Rule in Publication 939, the exclusion percentage is your investment in the contract divided by the expected return, rounded to three decimal places. For a fixed-period annuity, paid for a definite period such as a fixed number of months (but not less than 13), the expected return is the payment times the number of payments. In the full-cost $200,000 example, $200,000 ÷ ($1,319.91 × 240) gives 63.1%, so $832.86 of each payment is tax-free and $487.05 is taxable. The calculator shows this for level payments over 2 years or more when you choose after-tax money. If payments rise later, the tax-free amount stays at what was figured when payments started and the increases are fully taxable; for increases scheduled in advance, Publication 939 points to Regulations section 1.72-5(a)(5), which the calculator does not apply.

If the annuitant, or the last annuitant, dies before the whole cost has come back tax-free and the annuity starting date is after July 1, 1986, the unrecovered cost is an itemized deduction on the final return. Distributions from a nonqualified annuity count as net investment income when working out the net investment income tax.

Before payouts start, the interest in an annuity is not taxed until you withdraw it or receive payments, and the taxable part is taxed as ordinary income. A withdrawal from a nonqualified annuity before payouts start comes out of earnings (taxable) first and your cost second. For a contract bought before August 14, 1982, money invested before that date and its earnings come out cost first. Most distributions from qualified plans and nonqualified annuity contracts before age 59½ owe an extra 10% tax on the taxable part. For nonqualified contracts, the exceptions include payments from an immediate annuity: a single premium contract with substantially equal payments that start within 1 year of purchase and are paid at least once a year. For early withdrawals from a 401(k), see the 401(k) early withdrawal calculator; for penalty-free payments from an IRA before 59½, the 72(t) calculator.