Funding a $200,000 annuity with after-tax savings triggers an exclusion ratio, shielding part of each payment from taxes until full basis is recovered.
IRA-funded annuities offer zero extra tax advantage since every payment is fully taxable ordinary income, meaning buyers pay only for the lifetime income guarantee.
Both annuity types raise income measures that increase Social Security taxation and Medicare surcharges, but the IRA brother faces greater exposure because his full payment counts as income.
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Two brothers walk into the same insurance office in the same week. Each writes a $200,000 check and buys the same immediate annuity from the same carrier. Each will receive the same monthly payment for life. The only difference is where the money came from. One brother funded the purchase from a taxable brokerage account he had been building for decades. The other funded it from a traditional IRA. When the checks start arriving, one brother pays tax on every dollar he receives, and the other pays tax on only part of each payment for years.