Whether SPIA payouts are taxable or not depends on the original source of the money. If the funds used to purchase the SPIA are from an IRA, then yes, all payouts are fully taxable. If the funds are from a taxable brokerage then the tax status is determined by the exclusion ratio that depends on the age of the recipient. There may be one, two or more years when the payouts are fully tax free, and then additional years when they are only partially taxable. Additionally, because of the recent change in tax law, the fair market value (FMV) of an SPIA purchased with tax deferred money can be added to the value of other IRAs to determine RMDs. Because the SPIA typically pays out much more than the RMD of the FMV, the overall RMD is reduced, thus potentially the reducing overall tax burden.4. SPIA payouts are taxed as ordinary income, and if the owner is in a state with an income tax, it gets worse. Contrast this with paying capital gains on qualified dividends in the 0% bracket, or long-term capital gains on stock sales. The OP's mother can invest in municipal bonds in her state and pay no taxes on the interest. SPIAs get bad tax treatment.
Specific example: we purchased an SPIA without a refund at death rider for my then 89 year old mother-in-law 3 1/2 years ago using taxable funds. All the payouts to date have been tax free and will continue to be for another 2 more years. Annual payouts at purchase time were ~19% of the premium. Furthermore, she has a second SPIA her husband purchased before his death with tax-deferred funds. Using the FMV of that annuity allowed us to reduce her RMDs on her IRAs sufficiently to save ~$2000 compared to the prior law that did not allow that approach.
I appreciate that you believe SPIAs are not appropriate, but depending on the individual situation, they can be not only appropriate, but optimal. In our case with an extremely healthy woman, heirs who do not need the inheritance of the SPIA premium, and desire for a hands-off guaranteed income source for lifetime, we fit in that optimal category.
Wrench
Statistics: Posted by Wrench — Mon Feb 09, 2026 2:34 pm — Replies 60 — Views 3386