Calculating the Tax on an IRA Annuity Funded with After-Tax Dollars
I received a Form 1099-R from my insurance company on an qualified (IRA) annuity I annuitized last year. The payout is over a 10-year fixed period of time. Approximately 20% of the annuity was funded with after-tax dollars, and no income tax is being withheld.
How is the taxable portion calculated since the payout includes money previously taxed? I think it is computed using the “General Rule” as outlined in IRS Pub 939, General Rule for Pensions and Annuities. But this addresses the purchase price of the annuity vs. the expected return. The purchase price was zero because the annuity resulted in an earlier “rollover” from another IRA annuity. Consequently, there was no purchase price. However, the annuity was funded, in part, over the years before being annuitized with after-tax money. I am not sure if the “General Rule” and the worksheets in Pub 939 apply. If so, would the after-tax dollars considered to be my “net cost” in the annuity?
Comments welcome.
Permalink Submitted by Alan - IRA critic on Tue, 2023-02-14 20:43
Pub 939 does not apply here. Annuities in IRAs follow the IRA distribution rules, not the annuity rules. Your IRA basis is tracked on Form 8606 and all your IRAs are treated as one combined IRA. However, the IRS has never published guidance on application of basis to an annuitized IRA that no longer has a year end account balance to enter on line 6 of Form 8606. That forces you to improvise to complete the form. For example, you might show the year end value of the annuity as the premium you paid for the first annuity less distributions you have received since the annuity payments began in 2022. The IRS is not likely to question your method as long as you stay consistent from year to year. Hopefully, you filed Form 8606 correctly starting with the year you first made non deductible TIRA contributions and updated for subsequent contributions or distributions you might have taken prior to annuitizing. There will also be a confusing RMD situation if the 10 year annuity period does not end prior to your first RMD year.