General information only. Not tax, legal or investment advice. A planning idea named here is not a recommendation for any person. Prem Tax and Accounting Corp is a CPA firm, not a law firm. Tax rules change often and figures are for the tax year shown: confirm with the official source or a qualified adviser before you act. Read the full notice. Book a 10-minute call.

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Annuity fine print: costs, limits and the surprise tax

Before anyone weighs an annuity, the costs, the limits on insurer backing and one extra tax deserve a look. General information only, not a recommendation of any product or insurer.

Prepared by Prem Tax and Accounting Corp. Last reviewed November 6, 2026. Figures as of November 6, 2026.

Before weighing an annuity, it helps to know the costs, the limits on insurer backing and one surprise tax. This is general information, not a recommendation of any product or insurer. We read the fine print with the Fee-Line Highlighter Pass below.

The short version

Surrender charges, market value adjustments and fund or rider fees can cut what you take out.
If an insurer fails, Illinois' guaranty association covers up to $250,000 of annuity benefits per person, generally $300,000 in all. It is a limit, not a reason to buy.
Settled law: non-qualified annuity gains are investment income for the 3.8 percent net investment income tax (NIIT) on MAGI above $200,000 for single or head of household filers ($250,000 joint), thresholds set by statute and not indexed.

Costs to ask about

Cost	What it is
Surrender charge	A fee for early withdrawal that usually shrinks each year; most contracts with one allow free withdrawals, usually up to 10 percent a year
Market value adjustment	Can raise or lower your value on an early withdrawal; often negative, on top of the surrender charge
Fees	Variable annuities add insurance, fund and rider fees (an SEC example: 1.25 percent a year for the insurance charge); other kinds often build costs into caps and rates

An invented NIIT example for 2026

A couple filing jointly has $230,000 of wages and $5,000 of dividends. Annuity gain counts as investment income. Taxable IRA payouts do not, but they raise MAGI.

Scenario	MAGI	Investment income	NIIT
No surrender	$235,000	$5,000	$0
$60,000 taxable IRA payout	$295,000	$5,000	$190
$60,000 annuity gain	$295,000	$65,000	$1,710

The NIIT is 3.8 percent of the smaller of investment income or the amount MAGI exceeds the threshold. For the annuity case that is 3.8 percent of $45,000.

Other rules to know

Illinois premium tax: the 0.5 percent insurer privilege tax leaves out annuity premiums.
Sales rules: Illinois' sales rule, amended effective February 3, 2023, requires producers to act in the consumer's best interest but creates no fiduciary duty. The 2024 federal Department of Labor fiduciary rule was vacated by a court, so it is not in force (notice published March 20, 2026).
Heirs: there is no basis step-up. If the owner dies before payouts start, a beneficiary generally takes the money within 5 years, takes life payments starting within a year, or a spouse continues the contract.
Seniors: taxable annuity income raises MAGI and can shrink the temporary senior deduction (tax years 2025 to 2028).

The Fee-Line Highlighter Pass

People in this situation often consider these steps; ask your adviser.

Ask for the surrender schedule, free-withdrawal amount and any market value adjustment in writing.
Highlight every fee line and, for indexed contracts, the cap, participation rate and spread.
Read the guaranty association summary the insurer must deliver.
Estimate MAGI with and without a planned withdrawal to see the NIIT first.

See the annuities group page, how annuity income is taxed, types and 1035 exchanges and Illinois state taxes.

Common questions

Does the guaranty association protect my whole annuity?

Only up to its limits. It excludes index interest not yet credited and the unpromised part of a variable annuity, and coverage depends on residence and the insurer's membership.

Does the NIIT apply to IRA payouts?

No, but taxable IRA payouts raise MAGI, which can put other income over the threshold.

Does Illinois charge a premium tax on annuities?

Not through the 0.5 percent insurer privilege tax, which leaves out annuity premiums. Other states may differ.

Official sources

Keep reading

Please read: general information only

This page gives general information and education about current federal and state tax topics, including recent legislation, planning ideas, retirement and annuity rules, and court decisions. It is not tax, legal, accounting, investment, insurance or other professional advice, and it is not a substitute for advice from a qualified CPA, attorney or other adviser who knows your facts. Reading it does not create a CPA-client or any other professional relationship with Prem Tax and Accounting Corp. Prem Tax and Accounting Corp is a CPA firm, not a law firm. It does not sell insurance or investment products, and it does not recommend, rate or sell any annuity, fund or other product. A planning idea, a strategy name or an example here is not a recommendation to take or avoid any action.

Tax rules, thresholds, rates and deadlines change often, and Congress, the IRS, the courts and the states change how they apply them. Guidance on recent legislation is still being issued. We checked the figures against the official sources named on the page on the date shown (last reviewed November 6, 2026), but we do not promise that this page is complete, current or free of errors, and we do not update it the moment a rule changes. Where the rules are unsettled or guidance is still pending we say so. Amounts for a future year are labelled planning figures until the IRS or another agency publishes them. Examples use invented numbers and are for illustration only.

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Questions about how the new tax law or your year-end moves apply to you? Keshav Agrawal is a U.S. CPA and a Chartered Accountant (CA) from India. We prepare U.S. and Illinois returns, plan with you, and work alongside your financial adviser, insurance agent or attorney. We sell no investment or insurance products. Book a 10-minute call or send us a message.

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