This article describes how to enter a non-qualified or variable annuity in your Plan, including the tax treatment of withdrawals and annuitized payments, and where the workaround falls short.

The Planner doesn't have a dedicated annuity-tax feature yet. You can approximate the tax treatment of most annuities once you know the value and how it's taxed, and this article shows how. The approach has limitations, which are listed near the end. Read them before you decide whether the workaround fits your annuity.

If you just want to enter a straightforward annuity as an income stream, see How to enter an annuity. This article covers the tax modeling for the cases the annuity feature can't capture on its own.

Please note: It's tempting to enter a non-qualified annuity as an after-tax investment account with capital gains tax treatment. That setup doesn't match how an annuity is taxed. The Planner taxes the growth of a capital gains account every year, even when you take no withdrawals, and it applies long-term capital gains rates. In a non-qualified annuity, growth is tax-deferred and the earnings are taxed as ordinary income when you withdraw them. If you entered your annuity this way, use the steps below instead.

If you bought the annuity inside a 401(k) or traditional IRA, enter it as an Other Pre Tax account. The Planner will model RMDs on the account, and all withdrawals are taxed as ordinary income.

With a non-qualified annuity, your contributions come back tax-free and only the earnings are taxable, as ordinary income. How the taxable and tax-free portions are calculated depends on whether you take partial withdrawals or annuitize.

Before you annuitize, partial withdrawals are taxed last in, first out: earnings come out first and are taxed as ordinary income until all earnings are gone. After that, withdrawals are a tax-free return of your contributions.

Model this in three parts.

Please note: This account represents the contributions you've made to your annuity, which are non-taxable. If you're still contributing and this wasn't a lump-sum purchase, model ongoing contributions as transfers into this account from an after-tax account, with the appropriate amount and start/stop ages. Confirm the contributions are funded and adjust as needed.

Create a pension equal to the amount of earnings you plan to withdraw, with start and stop ages, 0% COLA, taxable set to Yes, and survivor benefit 100%.

Please note: This represents the earnings-first (LIFO) withdrawal, taxed as ordinary income, that happens before any return of contributions.

Estimating your earnings: Your withdrawable earnings equal your annuity's projected value at your payment age minus your total contributions. Your provider or statement is the best source for projected value, but you can also estimate it in the Planner: temporarily set the contributions account to your expected rate of return and read its balance at your payment age in Savings > Insights (value including growth), then read it again at 0% return (your total contributions). The difference is your earnings. Reset the account to 0% return when you're done.

Once all earnings have been withdrawn, further withdrawals are a tax-free return of your contributions. Model these as a transfer from the contributions account to your desired after-tax account.

When you annuitize, each payment is split into a taxable portion (earnings) and a tax-free portion (return of contributions), set by the exclusion ratio in your contract. Model this with two pensions:

Please note: Two pensions are needed because annuitized non-qualified payments are split by the exclusion ratio: one part taxable earnings, one part tax-free return of contributions.

Variable annuities are modeled the same way. The Planner doesn't have a dedicated variable-annuity section, but as long as you know the annuity's value and how it's taxed, you can model it with the qualified or non-qualified steps above, depending on how it was funded.

This workaround approximates the tax treatment. Keep these differences in mind, especially for a deferred annuity with many years of growth ahead of it.

The workaround is the best fit for annuities that are close to payout or already annuitized. For a deferred annuity with a long growth period, treat the results as an estimate. Native support for non-qualified annuity taxation is a feature we're tracking.

Which method do I use, qualified or non-qualified? It depends on how the annuity was funded. Pre-tax or tax-deductible dollars (for example, an annuity inside a 401(k) or traditional IRA) mean qualified. After-tax dollars mean non-qualified.

Why not enter my non-qualified annuity as an after-tax investment account? That account type taxes growth every year at capital gains rates. A non-qualified annuity grows tax-deferred, and its earnings are taxed as ordinary income when withdrawn.

Why are two pensions needed for an annuitized non-qualified annuity? Because each payment is part taxable earnings and part tax-free return of contributions. One pension carries the taxable portion, the other the non-taxable portion, matching your contract's exclusion ratio.

How do I model a variable annuity? The same way as any annuity: use the qualified or non-qualified steps above based on how it was funded. There's no separate variable-annuity feature; you just need the value and the taxation.

How to represent qualified, non-qualified, and variable annuities in your plan, including the tax treatment of withdrawals and annuitized payments

Will this work for connected accounts? If your annuity is linked through account connections, don't add the contributions account. The linked balance would be counted twice. To use these steps, unlink the account and enter it manually. Your balance will no longer update automatically.