How to Calculate After-Tax Annuities
Your total balance in an annuity is divided between your contributions into the account and the growth of the annuity investments. When you receive payments from your annuity, your payment is partly a return of your contributions and partly annuity investment gains. The percentage of your annuity payments for your contributions are tax-free. The percentage of payments for investment gains is taxable. To calculate your after-tax annuity payment, you must account for the taxation of the investment gains.
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Instructions
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1
Look up the purchase price of your annuity in your investment records. This is your initial investment in the plan.
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2
Add any additional contributions made to the annuity to the initial investment. This calculates your total investment in the annuity.
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3
Multiply the annual payment from the annuity by its total years of payment to calculate its total payment. If your annuity pays out $20,000 for 20 years, its total payment is 20 x 20,000 = $400,000.
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Divide your total investment into the annuity by its total payment to calculate the percentage of tax-free payments.
If you invested $160,000 into your annuity and its total payment is $400,000, your tax-free percentage is $160,000/$400,000 = 0.40, or 40 percent. Forty percent of your annual annuity payments are tax-free.
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Multiply your annual annuity payment by the tax-free percentage. This calculates the portion of your payment that is a tax-free return of your contribution. The remaining payment is taxable.
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Multiply the taxable portion of your annuity by your tax rate. This calculates the after-tax payment of your annuity's investment gains.
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Add the after-tax payment of your investment gains to the tax-free return of your contributions to calculate your total after-tax annuity payment.
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Tips & Warnings
If you financed your annuity with a rollover from a retirement plan, such as a 401k, the entire annuity payment is taxable. You would have owed tax on 401k withdrawals, so this taxation continues if the account is moved into an annuity.
