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Catalina Structured Funding

Annuity Tax Calculator

Estimate the federal tax on a non-qualified annuity withdrawal under the LIFO rule (IRC § 72(e)(2)(B)), or the exclusion ratio on an annuitized payment stream (IRC § 72(b)). Includes the federal 10 percent early-withdrawal penalty (IRC § 72(q)) and California's 2.5 percent state penalty stack (Cal. Rev. & Tax. Code § 17085(c)(1)).

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Who this calculator is for

This calculator handles federal tax on non-qualified deferred annuities. That covers inherited annuities (passed to you as a beneficiary) and annuities you purchased with after-tax money — including non-qualified annuities bought after receiving a settlement. If your payments come from a structured settlement annuity awarded for a personal physical injury claim, your payments and any sale to CSF are generally tax-free under IRC § 104(a)(2). You do not need this calculator. See our structured settlement federal tax rules guide for that framework.

Estimate the tax on a single lump-sum withdrawal from a non-qualified deferred annuity under the IRC § 72(e)(2)(B) LIFO rule.

Pick your highest 2025 federal tax bracket.

California adds a 2.5% state penalty under Cal. Rev. & Tax. Code § 17085(c)(1).

This is an educational estimate, not tax advice. Actual tax treatment depends on your full financial picture, your filing status, your other income, the type of annuity (qualified vs. non-qualified), whether the contract was purchased before August 14, 1982, the IRC § 72(e)(11) aggregation rule for multiple annuities issued by the same insurer in the same year, and other factors. Consult a CPA or tax attorney before acting on any specific number. Catalina Structured Funding does not provide tax advice.

This content is for educational purposes only and does not constitute financial advice. Consult a qualified financial advisor before making financial decisions.

How This Calculator Works

The calculator covers the two most common federal-tax decision points for non-qualified deferred annuities. Mode 1 estimates the tax on a single lump-sum withdrawal under the LIFO rule. Mode 2 estimates the per-payment exclusion ratio when you annuitize the contract. Both modes are grounded in Internal Revenue Code § 72.

The LIFO Rule for Withdrawals

Under IRC § 72(e)(2)(B), withdrawals from a non-qualified deferred annuity come from earnings first and return non-taxable principal only after the earnings are exhausted. The “last in, first out” framing reflects the fact that the most recent dollars in the contract (the gain on top of your basis) come out first for tax purposes. If you withdraw less than the total gain, the entire withdrawal is taxable. If you withdraw more than the gain, the excess is a tax-free return of basis.

A worked example. You invested $50,000 in a non-qualified deferred annuity. It is now worth $80,000. You withdraw $45,000. The first $30,000 (the full gain) is taxed as ordinary income. The remaining $15,000 is a tax-free return of basis, and your remaining basis drops to $35,000.

The Exclusion Ratio for Annuitized Payments

When you annuitize (convert the contract into a guaranteed stream of payments), each payment is split between a tax-free return of basis and taxable earnings under IRC § 72(b). The exclusion ratio is your basis divided by the total expected payout over the life of the annuity. Each monthly payment is split using that ratio: the tax-free portion is the monthly payment times the exclusion ratio, and the rest is taxable.

A worked example. You own a non-qualified annuity with $50,000 basis and $80,000 current value. You annuitize at age 65 with a 20-year life expectancy and elect $425 per month. Total expected payout: $102,000 ($425 × 240 months). Exclusion ratio: 49 percent ($50,000 / $102,000). Each $425 payment is split into $208.25 tax-free and $216.75 taxable as ordinary income. If you live past 20 years, the exclusion ratio drops to zero because the full basis has already been returned, and the entire $425 monthly payment becomes taxable.

The 10 Percent Federal Early-Withdrawal Penalty

IRC § 72(q) imposes a 10 percent additional tax on the taxable portion of a non-qualified annuity distribution if you are under age 59½. The penalty stacks on top of regular income tax, not in lieu of it. Several exceptions reduce or eliminate the penalty: distributions after death or total disability, distributions under a series of substantially equal periodic payments, distributions allocable to investments made before August 14, 1982, and a few others. The calculator flags the penalty when your input age is below 60 as a conservative proxy for the 59½ threshold.

California's 2.5 Percent State Stack

California is one of the few states that imposes a separate state penalty on early annuity distributions. Under Cal. Rev. & Tax. Code § 17085(c)(1), California applies its own 2.5 percent additional tax on the federal-penalty base. The California penalty stacks on top of the federal 10 percent for California residents, so the combined penalty for an under-59½ taxable distribution in California is 12.5 percent in addition to regular income tax.

What This Calculator Does Not Account For

The calculator estimates the federal mechanics that drive most non-qualified annuity tax bills. It does not account for the following factors, which can change the answer materially.

  • The IRC § 72(e)(11) aggregation rule, which combines multiple annuity contracts issued by the same insurer to the same owner in the same calendar year as a single contract for distribution taxation.
  • The pre-August-14-1982 FIFO exception. Contracts purchased before that date use first-in, first-out instead of LIFO, so withdrawals come from principal first and the tax bill is deferred.
  • Your state income tax on the taxable portion (other than the California 2.5 percent penalty handled here). Nine states have no personal income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming), but the other 41 plus DC tax annuity earnings to varying degrees.
  • Your filing status and other income. The marginal-rate dropdown is a proxy. Federal tax is actually layered across the brackets, and the taxable annuity portion can push you up a bracket or two depending on your other income.
  • State premium taxes paid at purchase. Eight states impose a state premium tax on annuity considerations on the front end, paid by the insurer. See the per-state pages linked below for premium tax rates.
  • The IRC § 104(a)(2) exclusion for structured settlement annuities. If your annuity is a structured settlement from a personal physical injury claim, the underlying payments are tax-free, and selling your payments to a buyer like CSF under a court-approved transfer preserves that treatment. The calculator above is for non-qualified deferred annuities, not structured settlement annuities.

Selling vs. Surrendering vs. Annuitizing

The tax math is one input into the broader decision about what to do with an annuity you no longer need. We cover the decision framework, including how selling annuity payments to a buyer compares with surrendering the contract to the issuer, in our guide to selling or cashing out an annuity. For a deeper read on the federal-tax mechanics specifically, that post now includes a substantial “How Annuity Distributions Are Taxed: The Federal Framework” section synthesizing IRC § 72, § 86, and § 17085(c)(1) for California.

For state-specific annuity rules (Best Interest standards, premium taxes, free-look periods, guaranty caps, regulator helplines), use our state annuity rules lookup or see our state pages from the annuities hub. For the California-specific framework including the 30-day senior free-look extension (Cal. Ins. Code § 10127.10), see our California annuity page. Have a structured settlement annuity instead? See our structured settlement federal tax rules guide.

Frequently Asked Questions

How are non-qualified annuity withdrawals taxed?
Under the LIFO rule (last in, first out) at IRC § 72(e)(2)(B), withdrawals from a non-qualified deferred annuity come from earnings first and return non-taxable principal only after the earnings are exhausted. Earnings are taxed as ordinary income at your marginal federal rate. If you are under age 59½, a 10 percent federal additional tax under IRC § 72(q) applies to the taxable portion. California adds a separate 2.5 percent state early-withdrawal penalty under Cal. Rev. & Tax. Code § 17085(c)(1). This calculator applies the LIFO rule to estimate the taxable portion and totals these taxes.
What is the annuity exclusion ratio?
The exclusion ratio is the formula used under IRC § 72(b) to split annuitized payments between a tax-free return of basis and taxable earnings. The ratio is your investment in the contract (basis) divided by the total expected payout over the life of the annuity. Each monthly or annual payment is split using that ratio: the tax-free portion equals the payment times the exclusion ratio, and the remainder is taxable as ordinary income. The exclusion ratio applies until you have recovered your full basis; if you live past that point, the entire payment becomes taxable.
Does the 10% federal early-withdrawal penalty apply to me?
The 10 percent additional tax under IRC § 72(q) applies to taxable distributions from a non-qualified deferred annuity if you are under age 59½. Several exceptions reduce or eliminate the penalty, including distributions after the contract owner's death or total disability, distributions under a series of substantially equal periodic payments for life, and distributions allocable to investments made before August 14, 1982. The penalty stacks with regular income tax, not in lieu of it. The calculator flags the federal 10 percent and California's 2.5 percent state penalty when your input age is below 60 as a conservative proxy for the 59½ threshold.
What is the annuity aggregation rule?
Under IRC § 72(e)(11), all deferred annuity contracts issued by the same insurance company to the same owner during the same calendar year are aggregated and treated as a single contract for purposes of distribution taxation. Congress added the rule to prevent owners from using multiple low-gain annuities to take low-tax withdrawals while leaving high-gain annuities untouched. The aggregation rule does not apply to immediate annuities, to annuities purchased from different insurance companies, or to qualified annuities held inside an IRA, 401(k), or similar tax-deferred plan. This calculator does not account for aggregation; if you own multiple annuities from the same insurer purchased in the same year, your effective tax bill may be higher than the calculator estimates.
Are structured settlement annuity payments taxable?
No, generally not. Structured settlement annuity payments from personal physical injury or sickness claims are excluded from gross income under IRC § 104(a)(2). That tax-free treatment is preserved when you sell your future payments to a buyer like CSF under a court-approved transfer that complies with the federal IRC § 5891 qualified-order framework. This calculator is designed for non-qualified deferred annuities, where federal taxation under IRC § 72 applies. If your annuity is a structured settlement from a personal injury case, the tax outcome is different and generally more favorable.
Does this calculator give tax advice?
No. The calculator provides an educational estimate based on the federal LIFO rule, the exclusion ratio formula, the 10 percent early-withdrawal penalty, and California's 2.5 percent state penalty stack. It does not account for your full filing status, state income tax other than the California penalty, the aggregation rule across multiple annuities, the pre-August-14-1982 FIFO exception, or other personal tax factors. Consult a CPA or tax attorney before acting on any specific number. Catalina Structured Funding does not provide tax advice.

Selling Your Annuity Payments Instead?

If you are considering selling future annuity payments rather than taking a taxable withdrawal, CSF will quote a lump sum against your specific contract. For structured settlement annuities, IRC § 104(a)(2) generally preserves the tax-free treatment through a court-approved transfer. Call to talk through your situation.

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