Buy an immediate annuity with money you have already paid tax on, and part of every check comes back to you free of income tax. The fraction that comes back tax-free is what the IRS calls the exclusion ratio. Most people who ask us about it want to know how the number is figured and how long it lasts. A few also want to know what the insurance company will print on the 1099-R. This guide works through each of those from the IRS's own publications, using the figures in our October 2026 rate tables, and there is a calculator below for your own numbers.
The Formula
The rule lives in Section 72(b) of the Internal Revenue Code. The tax-free part of each payment "bears the same ratio to such amount as the investment in the contract bears to the expected return under the contract." In plain terms:
Exclusion ratio = investment in the contract ÷ expected return
- Investment in the contract is what you paid for the annuity, less anything you already received tax-free before payments began (Section 72(c)(1)). For a SPIA bought with after-tax savings, that is your premium.
- Expected return is the total the IRS expects the contract to pay you over your lifetime: the annual payment multiplied by a life-expectancy figure from the IRS's own tables.
Round the ratio to three decimal places (that is Step 3 of the General Rule computation in Publication 939), multiply it by each payment, and the result is the tax-free part. The rest is ordinary income. Commercial annuities bought with after-tax money must use this General Rule. Pensions paid from employer plans generally use a different Simplified Method covered in Publication 575; the main exception is a plan annuitant who is 75 or older with 5 or more years of guaranteed payments, who is sent back to the General Rule.
Where Expected Return Comes From: Publication 939
IRS Publication 939 (revised December 2025) carries the actuarial tables. Since July 1, 1986 the tables have been unisex: Table V for one life, Table VI for two lives. A woman and a man of the same age get the same multiple, even though the woman's carrier quote is lower. You look up your age at the birthday nearest the annuity starting date, and the multiple is the number of years of payments the IRS expects you to collect.
| Age at purchase | Table V multiple (single life) | Table VI multiple (joint life, both the same age) |
|---|---|---|
| 55 | 28.6 | 34.4 |
| 60 | 24.2 | 29.7 |
| 65 | 20.0 | 25.0 |
| 70 | 16.0 | 20.6 |
| 75 | 12.5 | 16.5 |
| 80 | 9.5 | 12.8 |
Expected return on a single-life annuity is the annual payment times the Table V multiple. A 65-year-old receiving $693 a month has an annual payment of $8,316 and an expected return of $8,316 × 20.0 = $166,320. Monthly payments need no further adjustment; the adjustment table in Publication 939 applies only when payments are quarterly, semiannual, or annual.
The period-certain adjustment most articles skip
Nearly every SPIA we quote carries a guarantee. The figures on this site are single life with a 5-year period certain, meaning at least 60 payments go to someone even if you die in year one. Publication 939 treats that guarantee as a "refund feature" (payments that continue to a beneficiary as a return of what you paid if you die before a stated number of them has been made), and a refund feature reduces the investment used in the ratio. The exception is narrow: for a single-life annuity the value is zero only if the guarantee runs less than 2.5 years and you are 57 or younger.
The adjustment itself is a lookup. Take the guaranteed amount (60 payments × the monthly check), divide by the annual payment to get the number of guaranteed years (5), and read the percentage from Table VII for your age. Multiply that percentage by the smaller of your premium or the guaranteed amount, and subtract the result from your premium. At 5 years the Table VII percentages are 2% at age 60, 3% at 65 and 5% at 70. A 10-year certain is 4%, 6% and 11%. The adjustment moves the ratio by well under a point, and it does not lower the total you can eventually recover tax-free: Publication 939 says the recovery cap is your net cost "figured without any reduction for a refund feature."
Worked Examples at 60, 65 and 70 (October 2026 Rate Tables)
Each row uses the best of the 8 carriers in our rate tables as of for a $100,000 premium: single-life male, 5-year period certain, income starting one month after purchase. The tables pool IRA and non-qualified quotes; the tax treatment below applies to non-qualified money. Women's figures are lower at every age (the best at 65 is $658 a month); the IRS multiple is the same, so the ratio comes out a little higher. See female SPIA rates and joint rates for those figures.
| Age | Best figure | Table V | Expected return | Refund adjustment | Exclusion ratio | Tax-free / mo | Taxable / mo | Premium recovered |
|---|---|---|---|---|---|---|---|---|
| 60 | $649/mo | 24.2 | $188,470 | 2% × $38,940 = $779 | 52.6% | $341.37 | $307.63 | about age 84 |
| 65 | $693/mo | 20.0 | $166,320 | 3% × $41,580 = $1,247 | 59.4% | $411.64 | $281.36 | about age 85 |
| 70 | $767/mo | 16.0 | $147,264 | 5% × $46,020 = $2,301 | 66.3% | $508.52 | $258.48 | about age 86 |
Source: LifeAnnuities.us quote surveys run for real clients. The figures start from quotes our agent runs for real clients, not advertised rates or illustrations. For the base tables we received 54 survey runs covering 30 client scenarios, prepared July 14 to September 14, 2026, and used 52 of them for pricing (2 runs used annual payments and were left out of pricing). 17 carriers were quoted. On we checked the tables against 7 new survey runs (4 client scenarios, prepared September 18 to 29, 2026). 11 runs were received and 4 were not used (4 runs were for a 41-year-old, well below our table ages; two of them were at $5,000,000). We repriced 1 of the 8 carriers we publish (Athene, up about 1.8%) and held the other 7 at their earlier figures. A repriced carrier has its whole table moved by its own measured change on quotes for the same age and sex. New York Life: readings were mixed, so we held its figures until the next round. Two direct comparisons with mid-September quotes came in 0.7% and 1.6% higher once premium size is allowed for. A third, measured through August, came in 0.6% lower. How each figure is built. Men: 60, 65 and 80 read at surveyed ages; 55, 70 and 75 interpolated between surveyed ages. Women: all ages derived by ratio. Joint: 55, 60, 75 and 80 derived by ratio; 65 and 70 calibrated to a direct same-age joint quote. None of the figures in our tables is a direct quote from the latest survey round. They are built from earlier rounds (read at surveyed ages, interpolated or derived from carrier ratios) and checked carrier by carrier against the latest one. Joint figures at ages 65 and 70 are calibrated to a direct joint quote (same-age joint quote, both spouses 66, 100% to the survivor, 5-year period certain, prepared September 18, 2026). That corrects an estimate. It is not a market move. Basis: single life or joint (100% to survivor), 5-year period certain, income starting next month, per $100,000. Full method and known limits. Free to cite with attribution to LifeAnnuities.us.
Read the age-65 row line by line. The annual payment is $8,316. The guaranteed amount is 60 × $693 = $41,580, which is less than the premium, so the Table VII percentage of 3% applies to that figure: $1,247. The investment in the contract for the ratio is $100,000 − $1,247 = $98,753. Expected return is $8,316 × 20.0 = $166,320. Divide, round to three places, and the exclusion ratio is 59.4%. Of each $693 payment, $411.64 is a tax-free return of premium and $281.36 is ordinary income. Over a year that is $4,940 of income that never reaches your Form 1040. Without the guarantee the ratio would be 60.1%, so the 5-year certain costs about $4.85 a month of tax-free treatment. The difference is small, but the IRS requires it. Every dollar of interest from a CD or bond paying the same $693 a month would be taxable; see how annuities are taxed for that comparison.
Exclusion Ratio Calculator
Enter your premium and the monthly payment you have been quoted, or let the calculator fill in the best figure from our October 2026 rate tables for your age and payout type. It uses the Publication 939 Table V and Table VI multiples above (ages 55 to 90) and the Table VII refund percentages for a 5-year or 10-year period certain. Results are federal only and assume after-tax money and an annuity starting date after 1986.
After Your Premium Is Fully Recovered
The exclusion ratio is not permanent. Publication 575 puts it plainly: "If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost can't exceed your total cost." Once the tax-free portions add up to your premium, every later payment is 100% taxable. On the examples above that point arrives after 24 years 5 months for the 60-year-old (about age 84), 20 years 3 months for the 65-year-old (about age 85), and 16 years 5 months for the 70-year-old (about age 86). Notice that each is a few months longer than the Table V multiple, because the ratio was figured on the refund-adjusted investment while the cap uses the full premium.
The tax-free dollar amount is also frozen at the annuity starting date. If your contract has a cost-of-living increase, Publication 939 says "all increases in the installment payments are fully taxable." The tax-free part stays at the original figure until the premium is recovered.
If You Die Before Recovering It
The cap has a matching rule for your heirs. Section 72(b)(3) allows the unrecovered investment "as a deduction to the annuitant for his last taxable year," and Publication 575 confirms that "any unrecovered cost at your (or the last annuitant's) death is allowed as an itemized deduction on the final return of the decedent." On the 2025 Schedule A instructions it appears on line 16, Other Itemized Deductions, listed as "certain unrecovered investment in a pension." That line has no 2%-of-income floor, and the deduction is figured on the full premium, not the refund-adjusted figure. On a joint-life contract the deduction waits until the second death; the survivor keeps using the same exclusion percentage in the meantime, per Publication 939's joint and survivor example.
One practical note: the deduction only helps if the final return itemizes. And for the guaranteed payments that continue to a period-certain beneficiary, ask a tax professional how they are reported, since Publication 939 addresses survivor annuitants more directly than period-certain beneficiaries.
How It Shows Up on Form 1099-R
You will not fill out a Publication 939 worksheet every April. The insurance company does the arithmetic and reports it on Form 1099-R. For the 65-year-old in the example, a full year of payments would look like this:
| Box | What it shows | Example (full year at 65) |
|---|---|---|
| Box 1, Gross distribution | Total paid to you before withholding | $8,316 |
| Box 2a, Taxable amount | The part you report as ordinary income | $3,376 |
| Box 5, Insurance premiums | Premium recovered tax-free this year (the instructions list "premiums paid on commercial annuities" here) | $4,940 |
| Box 7 (7a on the 2026 form), Distribution code | 7 for a normal distribution, with D for a nonqualified annuity | 7D |
The instructions tell payers to fill box 5 for "nonqualified commercial annuities" with the premiums "recovered tax free during the year based on the method you used to determine the taxable amount to be entered in box 2a," so boxes 2a and 5 should add up to box 1. A payer that cannot compute the taxable amount leaves box 2a blank and checks box 2b, "Taxable amount not determined," but for a SPIA it issued, the carrier has everything it needs. The year your premium is fully recovered, box 5 drops to zero and box 2a equals box 1.
Code D flags income that may be subject to the 3.8% net investment income tax. Per the IRS's NIIT questions and answers, the taxable part of a nonqualified annuity counts as investment income, and the tax applies above $200,000 of modified adjusted gross income for single filers and $250,000 for joint filers, thresholds that are not indexed for inflation. The tax-free part is not income at all, so it does not count.
Qualified Money Has No Exclusion Ratio
Everything above assumes after-tax dollars. Buy the same SPIA inside an IRA and the payments are IRA distributions, taxed under Publication 590-B rather than Publication 939. If you only ever made deductible contributions, every dollar of every payment is ordinary income; there is no premium to recover because none of it was taxed going in. The exception is basis from nondeductible IRA contributions tracked on Form 8606, which makes a portion nontaxable under the IRA rules, not the exclusion ratio. Annuities paid from a 401(k) or other employer plan generally use Publication 575's Simplified Method, with the age-75 exception noted earlier. For how an IRA-funded SPIA works in practice, including required minimum distributions, see buying an annuity with IRA money.
This is why the same monthly check can leave you with very different after-tax income depending on which account bought it. If you hold both kinds of money, which account funds the annuity is worth a conversation with your tax professional before you sign, because required minimum distributions and your bracket in retirement both come into it.
What to Do Next
Run your own quote through the calculator above, then take three steps. First, decide whether the payout option you want is worth its refund adjustment; our guide to annuity payout options shows what each guarantee costs in monthly income, which matters far more than the small change in the ratio. Second, if you are married, compare single and joint and survivor payouts, remembering that the joint multiple is longer and the ratio lower. Third, get the exact figure in writing. When Phil runs a multi-carrier quote, ask for the taxable and tax-free split on each carrier's illustration and check it against this page. Request a quote here, or see how carriers compare first in how to compare SPIA quotes.
Questions People Ask About the Exclusion Ratio
Is the exclusion ratio different for men and women?
No. Since July 1, 1986 the IRS life-expectancy tables in Publication 939 (Tables V through VIII) have been unisex, so a 65-year-old man and a 65-year-old woman use the same 20.0 multiple. What differs is the carrier quote: a woman receives a smaller monthly payment for the same premium, so her expected return is lower and her exclusion ratio comes out a little higher.
Does a 10-year certain or cash-refund option change the ratio?
Yes, through the refund-feature adjustment in Publication 939. Any guarantee that continues payments to a beneficiary as a return of your premium reduces the investment used in the ratio by a Table VII percentage. A 10-year certain at 65 is 6% of the guaranteed amount, versus 3% for a 5-year certain. For a cash refund, the guaranteed amount is your premium, and the number of years is your premium divided by the annual payment, rounded to a whole year. The total you can recover tax-free over your lifetime stays at the full premium either way.
What happens if I outlive the IRS life expectancy?
Once the tax-free portions you have received add up to your premium, the exclusion ends and every later payment is fully taxable as ordinary income. Publication 575 states that for annuity starting dates after 1986 the total excluded over the years cannot exceed your cost. On the worked example at 65, that happens after about 20 years, around age 85. The check itself does not change; only the tax on it does.
Do I have to work out the exclusion ratio myself?
Usually not. The insurance company calculates it and reports the taxable part in box 2a of Form 1099-R and the tax-free premium recovered in box 5. The 1099-R instructions tell the payer to use the same method for both boxes. It is still worth checking the first year against the calculator on this page, because a wrong age or premium at the carrier carries forward for decades.
Does my state follow the federal exclusion ratio?
Most states start their income tax from federal figures, so the tax-free part of an annuity payment is generally not taxed by the state either, and several states exempt some or all retirement income on top of that. Rules differ, so check with your state revenue department or a tax professional before counting on a state result.
