What is the exclusion ratio on an annuity?
Understand the Problem
The question is asking about the exclusion ratio related to annuities, which is a concept in finance concerning how annuity payments are taxed. The exclusion ratio determines what portion of the annuity payments is considered a return of principal and thus tax-free, and what portion is considered taxable income.
Answer
The exclusion ratio is the percentage of an annuity payment that is not taxed.
The annuity exclusion ratio is the percentage of an annuity payment that is not taxed. It is calculated by dividing the principal paid by your expected return.
Answer for screen readers
The annuity exclusion ratio is the percentage of an annuity payment that is not taxed. It is calculated by dividing the principal paid by your expected return.
More Information
The exclusion ratio helps annuitants understand the portion of their payouts that are exempt from income taxes. It underscores the importance of knowing the initial investment (principal) and how returns are calculated over time.
Tips
A common mistake is confusing the principal amount with the entire payout. Only the portion representing the return of the initial investment is exempt from taxes.
Sources
- What is an Annuity Exclusion Ratio? How Does It Work? - canvasannuity.com
- Annuity Exclusion Ratio: What It Is and How It Works - annuity.org
- The web page with info on - Example Source - smartasset.com
