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When you take income from an annuity, the payouts
can be a fixed amount or a variable amount. They can
be for a guaranteed period, or you can choose to
receive income that you cannot outlive. You can also
opt to direct income to another party — such as a
nursing home.
If you put after-tax dollars into your annuity, your
income may also be tax-advantaged. That's because
each payout is composed of money you've paid into
the annuity and earnings. A formula unique to annuities,
called the exclusion ratio, helps determine which
portion of each payout is nontaxable until all of your
original purchase payments have been taken out. This
helps you spread out your tax burden at retirement.
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