Still don’t understand the difference between qualified and nonqualified funds? Check out this Abaris module to learn how your annuity will be taxed by the IRS. There are a number of tax implications associated with annuities and, as with all major financial decisions, it’s easy to get confused. We’ve laid out the basic tax implications that you need to know before you make a decision. The way income annuities are taxed is based on what kind of money goes into the purchase of the annuity. Specifically, whether the input money or premium is pre- or post- tax money. If the input is pre-tax dollars, then the distribution from the income annuity is subject to income tax. If the input funds are post-tax dollars, however, then the distributed payouts are partially taxed, and partially not taxed. This second type of income annuity (the one purchased with post-tax dollars) is known as a non-qualified annuity, and the distribution is broken into a principal, which is not taxed, and a gain, which is taxed. The size of the gain, meaning the taxed portion of the distribution, is calculated based on the Exclusion Ratio. The Exclusion Ratio is the ratio of the total investment in the contract to the expected return. To further break it down, the total investment in the contract equals the the premium you’ve paid for the contract. The expected return is simply the monthly payout times the IRS expectancy for how long you’ll receive those payments, or your life expectancy. This is no arbitrary number; far from it. The IRS uses actuarial tables based on age, sex, and overall health or longevity expectations to arrive at an average life expectancy of an individual. You’ve got the framework, now let’s see an example. Say you’ve invested $100,000 (the premium) in an annuity that will pay $750 per month ($9,000 per year), beginning at age 62, for the rest of your life. You are the sole annuitant, meaning the only person receiving the annuity payments, and you take no early withdrawals. According to the IRS longevity tables you’ll receive payments for 22.5 years. In order to determine the tax implications, we must find the exclusion ratio: Exclusion Ratio = Total Investment in the Contract / Expected Return Total Investment in the Contract = Premium = $100,000 Expected Return = Yearly Payout x Expected Years of Payout = $9,000 x 22.5 yrs = $202,500 So…. Exclusion Ratio = $100,000 / $202,500 = 49.4% Therefore, of the $9,000 you’ll receive each year, 49.4% will be non-taxed, meaning $4,446 will be non-taxed. This leaves the remaining taxed portion to be $4,554. The actual tax liability (or how much you pay in taxes) will depend on your individual tax bracket. And once you’ve received the entire premium back in the form of principal repayments, you’ll then be taxed on the entire amount. In this example, beginning at age 84.5 (62 years old + 22.5 years), your payouts would be fully taxed.

1. 1
TAXES DECODED
THE BASICS OF
ANNUITY TAXATION
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2. 2
Here are the basics of what you need to
know when making a decision
AS WITH ANY MAJOR FINANCIAL
DECISION, THE TAX IMPLICATIONS
ASSOCIATED WITH ANNUITIES
CAN BE CONFUSING

3. 3
The basic distinction on how annuities are taxed depends on the
MONEY GOING IN
INPUT
$ Post Tax
$ Pre Tax
INPUT
ANNUITY
ANNUITY
Part Taxed &
Part Not Taxed
DISTRIBUTION
Subject to
Income Tax
DISTRIBUTION

4. 4
ANNUITIES FUNDED WITH POST-TAX DOLLARS ARE CALLED
NON-QUALIFIED
DISTRIBUTION
PRINCIPAL (NOT TAXED)
GAIN (TAXED)

5. 5
THE TAXED PORTION OF YOUR DISTRIBUTION IS CALCULATED BY
THE EXCLUSION RATIO
RATIO
BUT WHAT DOES THIS MEAN?
TOTAL INVESTMENT IN THE CONTRACT
EXPECTED RETURN

6. 6
YOUR TOTAL INVESTMENT IN THE CONTRACT IS
The premiums you’ve paid for the
contract[1]
less any payments you’ve
received before payout
[1] As of starting date.

7. 7
THE EXPECTED RETURN IS
Monthly
Payout
IRS expectancy for how
long you receive those
payments
X

8. 8
To determine the average life expectancy
of someone the IRS uses ACTUARIAL
TABLES, which are based on
1
2
3
Age
Sex
Overall health/longevity expectations
[1] This is not a comprehensive list of assumptions used to derive actuarial tables.

9. 9
NOW LET’S LOOK AT AN EXAMPLE
You’ve invested $100,000 in an annuity
It pays out $750 a month for life
Distributions begin at age 62
No early withdrawals and only one annuitant

10. 10
THE EXCLUSION RATIO
Your investment is $100,000, THE EXPECTED RETURN IS
YEARLY PAYOUT X
$750 X 12
THEREFORE:
22.5 [1]
EXPECTED YEARS OF PAYOUT
EXCLUSION
RATIO
49.4%
$100,000
$9,000 X 22.5
$100,000
$202,500
[1] Per IRS Longevity Tables.

11. 11
SO WHAT DOES YOUR EXCLUSION RATIO MEAN EXACTLY?
Of the $9,000 you receive each year
You only pay taxes on the $4,554 part of your distribution. Actual tax
liability will depend on your individual tax bracket.
NON-TAXED PORTION $9,000 x 49.4%
$9,000 - $4,446
$4,446
$4,554TAXED PORTION

12. 12
THESE WERE JUST THE BASICS
SO WHAT SHOULD YOU DO?
Annuity taxation is incredibly complex.
The example we showed was meant to help you get a general
understanding of tax concepts.
Talk to a tax expert before making any financial decisions.
Look out for more Abaris modules! We’ll keep releasing our easy
to understand guides to navigate your decisions.

13. 13
DISCLAIMER
The information contained in this presentation, is provided for general informational purposes as a
convenience to Abaris Financial Inc. customers and Internet users and is based upon information
generally available to the public from sources believed to be reliable. Although we believe the
information provided herein is reliable, we have not verified this information and we do not guarantee
its accuracy, completeness, timeliness or availability. Any examples shown in this presentation are
purely hypothetical and have been included for demonstrational purposes only. This information
is subject to change without notice. This information is not a substitute for obtaining advice from
a qualified professional. Therefore, you should not rely solely upon this information in making any
decision. This information is not and does not constitute an offer to sell or a solicitation of an offer to
buy any security, service or product.
Abaris Financial Inc., Philadelphia, PA is neither a registered broker-dealer nor a registered investment
adviser. Nothing in this presentation, including links to other material, is intended as legal or tax
advice. Abaris Financial Inc.’s Licensed Producers do not give legal or tax advice. Taxpayers should
seek advice based on their particular circumstances from an independent tax advisor.