How a SPIA works
A SPIA is the simplest kind of Annuity. You pay an insurer one premium, choose how the income is paid, and the insurer promises a fixed schedule of payments. The tax code treats a contract as an immediate annuity when it is bought with a single premium, starts paying no later than one year after purchase, and pays substantially equal amounts at least once a year.
The deal is usually permanent. After a free-look period, often 10 to 30 days under state law, you generally cannot take the premium back, and there is no account balance to withdraw. In return you get income you cannot outlive. Pooling makes that promise possible: premiums from buyers who die early help pay those who live long, a benefit often called mortality credits.
That makes a SPIA a direct tool against longevity risk and a close cousin of a Pension. Many retirees use one to cover essential bills with guaranteed retirement income.
How much a SPIA pays: payout options and pricing
After the premium, the payout option is the biggest decision. Life-only income pays the most per dollar, because nothing is owed after your death. Each guarantee added for heirs, such as a 10-year period certain or a refund of unpaid premium, and each extra life covered, as in a joint-and-survivor contract, lowers the payment.
The payment for a given premium also depends on your age when payments start, since older buyers are expected to receive fewer payments; on interest rates when you buy; and on each insurer’s pricing, so quotes for the same contract can differ between companies.
Most SPIAs pay a level amount, which loses purchasing power to Inflation every year. Some contracts offer a fixed yearly increase in exchange for a lower first payment. A fixed increase is not the same as the protection a cost-of-living adjustment tied to actual prices gives Social Security.
How SPIA payments are taxed
The tax treatment depends on the money you use. If you buy a SPIA with after-tax savings, a nonqualified annuity, the IRS General Rule in Publication 939 splits each payment into a tax-free return of your premium and taxable income. The tax-free share is the exclusion percentage: your investment in the contract divided by the expected return, which is the yearly payment times a life-expectancy multiple from the IRS tables. A refund or period-certain guarantee can reduce the investment figure first.
The exclusion lasts until you have recovered your whole premium tax-free; after that, every payment is fully taxable. If you die before recovering it, the unrecovered amount is an itemized deduction on your final return. Because a nonqualified SPIA counts as an immediate annuity, §72(q) exempts its payments from the 10% additional tax even if they start before 59½. The taxable part counts as investment income for the net investment income tax.
If you buy the SPIA inside a traditional IRA or a workplace plan, this exclusion ratio does not apply: the payments are taxed like any other distribution from that account, which usually means fully as ordinary income unless you have after-tax basis there.
SPIA vs. other ways to create retirement income
People often set a SPIA’s payout beside a withdrawal rule such as the 4% rule, but the two are not like for like. A SPIA’s payment includes the return of your own premium and ends at death, while a withdrawal plan keeps the balance yours, available to heirs and exposed to sequence of returns risk. Weigh each alternative below on the same three points: how long its income lasts, whether it keeps up with prices, and what is left for heirs.
- Delaying Social Security: each year past full retirement age adds 8% until 70, and the benefit rises with inflation; the cost is the savings you spend while waiting. See delayed retirement credits.
- A bond ladder: payments for a fixed number of years with leftovers passing to heirs, but no protection if you outlive the ladder.
- A deferred income annuity such as a QLAC: a smaller premium buys income that starts as late as 85, insuring only a very long life.
- A workplace pension’s annuity: priced on different terms from a retail SPIA, so compare what the same income would cost; see pension lump sum vs. annuity.
SPIA pros, cons and common mistakes
A SPIA’s appeal is simplicity: income you cannot outlive, no investment decisions and, when bought with after-tax money, payments that are partly tax-free. The drawbacks are the mirror image: the premium is gone for good, level payments shrink in real terms, and heirs get nothing unless you pay for a guarantee. Because the purchase is hard to undo, the costly mistakes happen on the day you buy, so compare quotes from several insurers on identical terms first.
- Annuitizing money you may need for emergencies, care costs or large one-off expenses.
- Choosing life-only income when a spouse depends on it; a joint-and-survivor option keeps paying the second person.
- Reading the payout rate as an investment return, when much of each payment is your own premium coming back.
- Placing more with one insurer than the state guaranty association protects, instead of splitting between companies.
Illustrative numbers
Taxing a $100,000 life-only SPIA bought at 65
- Investment in the contract
- After-tax premium, reduced by the value of any refund or period-certain feature
- Annual payment
- The yearly income the contract pays
- IRS life-expectancy multiple
- From Table V of IRS Publication 939 for a single life (Table VI for two lives)
Applies to SPIAs bought with after-tax money; the tax-free total can never exceed what you paid.
Premium (investment in the contract)$100,000
Hypothetical income quote, life only$6,250 a year (about $521 a month)
IRS Table V multiple, age 6520.0
Expected return: $6,250 × 20.0$125,000
Exclusion percentage: $100,000 ÷ $125,00080.0%
Tax-free / taxable each year$5,000 / $1,250
For 20 years, until the $100,000 premium has come back tax-free at about age 85, only $1,250 of each year’s $6,250 is taxable. From then on every payment is fully taxable. If the buyer died at 75, the $50,000 not yet recovered would be an itemized deduction on the final return. The quote is illustrative, not a market rate.
At a glance
Common SPIA payout options and what they leave behind
| Payout option | What it pays | What is left after death |
|---|---|---|
| Life only | The highest income per dollar, for one life | Nothing; payments stop |
| Life with period certain (e.g. 10 years) | Income for life, guaranteed for at least the period | Remaining guaranteed payments to a beneficiary |
| Cash or installment refund | Income for life | Any premium not yet paid back, as a lump sum or continued payments |
| Joint and survivor | Income until the second death, sometimes reduced for the survivor | Nothing after the second death unless a guarantee is added |
| Period certain only | Income for a fixed number of years | Remaining payments; no protection against a long life |
Put it in your plan
SPIA in MoneyWhatIf
To test a SPIA in MoneyWhatIf, open What-If, lower the account that would pay the premium, and add the quoted payment as its own income card from the purchase year. Keep it flat for a level annuity, or set an inflation-linked or fixed increase if the contract rises. Because an owner’s income ends with their modeled lifespan, try both a longer and a shorter lifespan, then compare each path with the forecast you started from: income, taxes, withdrawals and later balances.
Common questions
SPIA FAQs
Can you get your money back from an immediate annuity?
Usually not once the free-look period ends. State law typically gives you 10 to 30 days after receiving the contract to cancel. After that, a SPIA generally has no cash value you can withdraw. If leaving money to heirs matters, a cash or installment refund option or a period-certain guarantee returns part of the premium to a beneficiary if you die early, at the cost of a lower payment.
What happens to a SPIA if the insurance company fails?
Annuity payments depend on the insurer’s ability to pay, and they are not FDIC-insured. If an insurer cannot meet its obligations, a state life and health insurance guaranty association, usually the one where you live, may cover all, part or none of the annuity, up to specified limits. Because coverage is capped, some buyers split a large purchase between insurers so that each contract stays within the protected amount.
What is the difference between a SPIA and a deferred income annuity?
Timing. A SPIA starts paying within a year of purchase. A deferred income annuity is bought now but starts paying at a date you choose, often years later, so the same income costs a smaller premium: the insurer invests the money for longer, and some buyers die before payments begin. A QLAC is a deferred income annuity that meets IRS rules for use inside an IRA or workplace plan and must start paying by 85.
What is the best age to buy an immediate annuity?
There is no single best age, but the trade-off is predictable. The older you are when payments start, the more income each dollar buys, because the insurer expects to make fewer payments. Waiting, though, means relying on savings and markets longer, and the price you get depends on interest rates at the time. Some retirees split the purchase across several years, which spreads that interest-rate timing and lets later purchases benefit from an older age.