Non-qualified tax deferred annuities that generate gain in the policy are subject to ordinary income tax at the effective tax bracket rate of the annuity owner. With the exception of lifetime annuitization of deferred annuities and life only immediate annuities, gain is distributed first, then basis. Lifetime annuitization pays the annuity basis as part of the payout until the basis has been distributed; then the entire payment is policy gain and subject to ordinary income tax. The basis is amortized to the life expectancy of the annuitant. This is called the exclusion ratio, because basis is excluded from taxes.
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Non-qualified tax deferred annuities that generate gain in the policy are subject to ordinary income tax at the effective tax bracket rate of the annuity owner. With the exception of lifetime annuitization of deferred annuities and life only immediate annuities, gain is distributed first, then basis. Lifetime annuitization pays the annuity basis as part of the payout until the basis has been distributed; then the entire payment is policy gain and subject to ordinary income tax. The basis is amortized to the life expectancy of the annuitant. This is called the exclusion ratio, because basis is excluded from taxes.