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Exclusion Ratio
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Exclusion Ratio

Non-qualified or "after tax" monies used to purchase annuity income have something qualified plans do not. The Exclusion Ratio or amount of the annuity payment that is not subject to income tax since it is considered to be a return of not only interest but of original principal "cost basis". The cost basis is the original investment and is not subject to income tax when distributed from a Personal Income Annuity.

The exclusion ratio is determined by the amounts of principal and interest being returned. An account with a large amount of credited interest will have a lower exclusion ratio than a mostly principal payout.

For example, if a 60 year old male with $100,000 and a cost basis of $50,000 purchases an annuity income for life the payment would be $594 per month of which 29% would be tax free.

If that same 60 year old had a cost basis of $100,000 the payment is still $594 per month however, the exclusion ratio would be 58%.

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Last modified: 02/10/10