Utah · Retirement Income · Annuities & Taxes
How Are Annuities Taxed in Utah? A 2026 Retiree Guide
IRA annuities, after-tax annuities, withdrawals before payments start, the 10% early tax, Utah's 4.5% rate and its retiree credits, with a worked St. George example built on the IRS's own tables.
The bottom line
- Utah taxes whatever part of your annuity income is taxable on your federal return, at a flat 4.5%. There is no Utah exclusion for annuities or pensions.
- An annuity bought inside an IRA or 401(k) is generally fully taxable when paid. One bought with after-tax money pays part of each check back to you tax-free under the IRS exclusion ratio.
- Withdrawals from a deferred annuity before payments start come out of earnings first. Under 59½, the taxable part can add a 10% federal additional tax.
- In our hypothetical St. George example, $650 a month from a $100,000 after-tax annuity started at 70 is about 80% tax-free, so Utah tax is about $70 a year instead of $351 if the same payments came from an IRA.
- In tax year 2023, 231,000 Utah returns reported $7.31 billion in taxable pensions and annuities, about $31,651 per return (IRS).
The short answer: Utah follows the federal rules for what part of an annuity is taxable, then taxes that part at 4.5%. So the question that really decides your tax bill is a federal one: was the annuity bought with pre-tax retirement money or with after-tax savings, and are you taking a withdrawal or receiving regular annuity payments? The sections below walk through each case using IRS Publications 575 and 939, the Utah State Tax Commission's instructions, and IRS data on Utah tax returns.
How many Utahns report annuity and pension income?
The IRS reports taxable pensions and annuities together, from line 5b of Form 1040. In Utah, that line added up to more than $7 billion in tax year 2023, the latest year the IRS has published by state.
Source: IRS Statistics of Income, Historic Table 2, Utah, Tax Year 2023 — irs.gov/statistics/soi-tax-stats-historic-table-2. Average and share are our arithmetic. Pensions and annuities are reported on one line, so these figures include employer pensions such as URS as well as annuities bought from insurance companies.
That is about 15.0% of the 1,542,530 individual returns filed in Utah for 2023, and the dollar total rose 5.6% from $6.92 billion in tax year 2022. A further 123,300 Utah returns reported $3.10 billion in taxable IRA distributions, which includes annuities held inside IRAs when they pay out through an IRA.
Is my annuity "qualified" or "non-qualified"?
This is the first thing to find out, because it decides almost everything else. Your annual statement or Form 1099-R will usually say which kind you have.
| Qualified annuity (IRA, 401(k), 403(b)) | Non-qualified annuity (after-tax money) | |
|---|---|---|
| Money that bought it | Pre-tax contributions or a rollover | Savings you already paid tax on |
| Your "investment in the contract" | Usually $0 (unless you made after-tax contributions) | What you paid in |
| Annuity payments | Generally fully taxable | Part tax-free under the exclusion ratio until your cost is recovered |
| Withdrawals before payments start | Fully taxable (pre-tax money) | Earnings come out first and are taxable |
| Required minimum distributions | Yes, under IRA and plan rules | No |
| 10% additional tax before 59½ | Yes, on the taxable part, unless an exception applies | Yes, on the taxable part, unless an exception applies |
| 3.8% Net Investment Income Tax | No (but it counts toward the income threshold) | Taxable part counts as investment income |
| Utah income tax | 4.5% on the taxable part | 4.5% on the taxable part |
Sources: IRS Publication 575 (2025), Pension and Annuity Income — irs.gov/pub/irs-pdf/p575.pdf; IRS, Net Investment Income Tax — irs.gov/individuals/net-investment-income-tax; Utah State Tax Commission, income tax rates — incometax.utah.gov/paying/tax-rates.
How is a non-qualified annuity payment split between taxable and tax-free?
The IRS calls this the General Rule, and Publication 939 says you must use it for an annuity bought with after-tax money. The tax-free share of each payment is your exclusion ratio: your investment in the contract divided by your expected return. For a life annuity, the expected return is your yearly payment multiplied by a life-expectancy factor from the IRS's Table V, using your age at the birthday nearest the date payments start.
IRS Publication 939 (Rev. December 2025), General Rule for Pensions and Annuities, Table V, Ordinary Life Annuities, One Life, Expected Return Multiples — irs.gov/pub/irs-pdf/p939.pdf. Multiples are for monthly payments; quarterly, semiannual and annual payments use small adjustments listed in the publication.
The older you are when payments start, the smaller the multiple, so the larger the share of each payment that counts as your own money coming back. The tax-free amount is fixed when payments begin and stays the same each year. Two limits apply under Publication 575: once you have recovered your full investment, every later payment is fully taxable, and if you die before recovering it, the unrecovered amount is an itemized deduction on your final return.
What does that look like for a St. George retiree?
Take a hypothetical Washington County retiree whose nearest birthday is 70 when payments start. They put $100,000 of after-tax savings into a single-life immediate annuity that pays $650 a month. The payment amount is an illustration to show the math, not a quote or a typical rate.
| Step | Calculation | Result |
|---|---|---|
| 1. Yearly payment | $650 × 12 | $7,800 |
| 2. Expected return | $7,800 × 16.0 (Table V, age 70) | $124,800 |
| 3. Exclusion ratio | $100,000 ÷ $124,800 | 80.1% |
| 4. Tax-free part of each payment | $650 × 80.1% | $520.83 |
| 5. Taxable part of each payment | $650 − $520.83 | $129.17 |
| 6. Taxable per year | $129.17 × 12 | $1,550 |
| 7. Utah income tax per year | $1,550 × 4.5% | $70 |
| Same $7,800 paid from an IRA annuity | $7,800 × 4.5% (fully taxable) | $351 |
Illustrative only. Our arithmetic using the IRS General Rule (Publication 939) and Utah's 4.5% rate. Assumes no refund or period-certain feature (which would lower the investment figure), no Utah credits, and federal tax left out. Not a projection or tax advice.
The exclusion lasts about 16 years in this example, until the retiree has recovered the full $100,000, which happens around age 86. After that, all $7,800 a year is taxable, and Utah tax on the payments rises to $351. Federal tax follows the same split. Your insurance company reports the taxable amount on Form 1099-R each year, but it is worth checking against your own worksheet.
What about pensions and annuities paid from an employer plan?
If you made after-tax contributions to an employer plan, Publication 575 generally requires the Simplified Method instead of the General Rule. You divide your cost by a set number of expected monthly payments based on your age when payments start:
| Age at annuity starting date | Number of payments (single life) |
|---|---|
| 55 or under | 360 |
| 56-60 | 310 |
| 61-65 | 260 |
| 66-70 | 210 |
| 71 or older | 160 |
IRS Publication 575 (2025), Simplified Method Worksheet, Table 1, for annuity starting dates after November 18, 1996. A joint-and-survivor annuity uses Table 2, based on combined ages (410 payments at combined ages of 110 or under down to 210 at 141 or older) — irs.gov/pub/irs-pdf/p575.pdf.
Many Utah public employees will have little or no cost to recover. The URS Tier 1 noncontributory system is paid for by employers, so those pension checks are usually fully taxable. Our URS pension guide covers the payment options.
How are withdrawals from a deferred annuity taxed?
Before you turn on annuity payments, a non-qualified deferred annuity follows an earnings-first rule for contracts bought after August 13, 1982. Publication 575's example: you take $7,000 from a contract with a cash value of $16,000 that you put $10,000 into. The first $6,000 is earnings and taxable; only the last $1,000 is a tax-free return of your money. Surrender charges are ignored when figuring the cash value for this purpose.
- Under 59½? The taxable part generally owes a 10% additional federal tax as well, unless an exception applies, such as payments for life in substantially equal amounts, disability, terminal illness or death. Utah does not add its own penalty, but it does tax the income.
- Moving to another annuity? A direct exchange of one annuity for another, with the same annuitant, is tax-free under the rules Publication 575 describes (often called a 1035 exchange). Cashing out and buying a new contract is not.
- Giving the annuity away? Transferring a contract issued after April 22, 1987 without full payment, other than to a spouse or ex-spouse in a divorce, is treated as if you withdrew the gain.
- Withholding. Insurers withhold federal tax on the taxable part unless you choose otherwise on Form W-4P (regular payments) or W-4R (one-time withdrawals). If you skip withholding, you may need estimated payments to the IRS and to Utah.
Before you withdraw, also check your contract's surrender charge schedule, which is separate from any tax. Our surrender charges guide explains Utah's rules.
Do Utah's retiree tax credits help with annuity income?
Only a little, and for some people annuity income actually shrinks them. According to the Tax Commission's TC-40A instructions:
- Retirement credit (code 18): up to $450 per person, but only if you were born on or before December 31, 1952. It shrinks by 2.5 cents for each dollar of modified income above $25,000 (single) or $32,000 (married filing jointly). You cannot combine it with the Social Security credit.
- Social Security benefits credit (code AH): offsets Utah tax on taxable Social Security, but it also phases out by 2.5 cents per dollar of income above $54,000 (single) or $90,000 (married filing jointly) on the 2025 instructions. Taxable annuity income counts toward those limits, so a larger taxable annuity can reduce the credit.
Source: Utah State Tax Commission, TC-40A Supplemental Schedule Instructions, Part 3, codes 18 and AH — incometax.utah.gov/tc-40a.
This is one reason the exclusion ratio matters in Utah: the tax-free part of a non-qualified annuity is not in your income at all, so it does not eat into the Social Security credit. Our Social Security tax guide walks through the credit in dollars.
What should a Utah retiree check before buying or turning on an annuity?
- Find out which kind you own. Qualified or non-qualified, and what your investment in the contract is. Your insurer can confirm both.
- Ask for the exclusion ratio in writing before you annuitize a non-qualified contract, and keep it with your tax records.
- Avoid withdrawals before 59½ unless an exception applies, and remember earnings come out first.
- Plan around income thresholds: Utah's Social Security credit, the 3.8% investment income tax and Medicare IRMAA all key off income, and the taxable part of annuity payments counts toward each.
- Set withholding on Form W-4P or W-4R so you are not surprised in April.
- Review beneficiaries. Heirs pay ordinary income tax on the gain, with no step-up in basis. Our beneficiary designations guide explains why the form matters more than your will.
Bring your annuity statements, your latest tax return and your Social Security estimate. We'll show how much of each income source is taxable, how it interacts with Medicare premiums, and where an annuity does and doesn't fit, in plain English and with no pressure. Education, not tax advice. We do not offer every plan available in your area. By calling or texting, you agree we may contact you at the number you provide; reply STOP to opt out.
Talk to a planner →Frequently asked questions
Does Utah tax annuity income?
Yes. Utah starts from your federal adjusted gross income, so whatever part of an annuity payment is taxable on your federal return is also taxed by Utah at its flat 4.5% rate, the rate the Utah State Tax Commission lists as current. Utah has no separate exclusion for annuity or pension income. The only age-based break is the retirement credit of up to $450 per person, and only people born on or before December 31, 1952 can claim it.
What part of my annuity payment is taxable?
It depends on what money bought the annuity. If it was bought inside an IRA, 401(k) or other retirement plan with pre-tax money, the whole payment is generally taxable. If you bought it with after-tax money (a non-qualified annuity), part of each payment is a tax-free return of what you paid in. The IRS General Rule in Publication 939 sets that tax-free share using an exclusion ratio: your investment divided by your expected return. Once you have recovered your full investment, later payments are fully taxable.
How are withdrawals from a deferred annuity taxed before I annuitize?
For contracts bought after August 13, 1982, withdrawals before the annuity starting date come out of earnings first, according to IRS Publication 575. In the IRS example, a $7,000 withdrawal from a contract worth $16,000 with $10,000 invested is $6,000 taxable and $1,000 tax-free. If you are under 59½, the taxable part can also owe a 10% additional federal tax unless an exception applies.
Is annuity income subject to the 3.8% Net Investment Income Tax?
The taxable part of a non-qualified annuity counts as net investment income, the IRS says. The 3.8% tax applies only when modified adjusted gross income is above $200,000 for single filers or $250,000 for married couples filing jointly. Annuity payments from an IRA or employer plan are not net investment income, though they still count toward that income threshold.
Do my heirs owe tax on an annuity I leave them?
Usually yes, on the gain. If you die before the annuity starts, IRS Publication 575 says the death benefit above your cost is income in respect of a decedent for the beneficiary, which means it is taxed as ordinary income and does not get the step-up in basis that stocks or a house get. Utah has no inheritance or estate tax of its own, but Utah income tax applies to whatever the beneficiary must report federally.
Sources
- IRS — Publication 575 (2025), Pension and Annuity Income: irs.gov/pub/irs-pdf/p575.pdf
- IRS — Publication 939 (Rev. December 2025), General Rule for Pensions and Annuities: irs.gov/pub/irs-pdf/p939.pdf
- IRS — Net Investment Income Tax: irs.gov/individuals/net-investment-income-tax
- IRS Statistics of Income — Historic Table 2, Individual Income and Tax Data by State, Utah, Tax Years 2022 and 2023: irs.gov/statistics/soi-tax-stats-historic-table-2
- Utah State Tax Commission — Income tax rates: incometax.utah.gov/paying/tax-rates
- Utah State Tax Commission — TC-40A Supplemental Schedule Instructions (retirement credit, Social Security benefits credit): incometax.utah.gov/tc-40a
- Social Security Administration — Medicare premiums: rules for higher-income beneficiaries: ssa.gov/benefits/medicare/medicare-premiums.html
About this article. Written by the Utah Retirement Income Data Desk and reviewed by Brian Penner, Retirement income & long-term care planner. Educational only — not financial, tax, investment, or legal advice. Tax rules summarized here come from IRS and Utah State Tax Commission publications current as of October 2026 and can change; check your situation with a tax professional, the IRS or the Utah State Tax Commission. Examples are hypothetical, use our own arithmetic, and are not quotes, projections or typical results. Utah Retirement Income is a licensed independent insurance agency (NPN 16493717) and is not a government agency; we are not connected with or endorsed by the IRS, the Utah State Tax Commission, the Social Security Administration, Medicare, the Centers for Medicare & Medicaid Services, or any government program. We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area; please contact Medicare.gov, 1-800-MEDICARE, or your State Health Insurance Assistance Program — in Utah, the Utah SHIP — to get information on all of your options. A $0-premium plan is not free; you still pay Part B premiums and cost-sharing. Annuities are insurance contracts, not bank deposits; they are not FDIC-insured, and guarantees are subject to the claims-paying ability of the issuing company. There are no guaranteed investment returns and no promise of tax savings. If you call or text us, you consent to be contacted at the number you provide about your options; message and data rates may apply, and you can opt out at any time by replying STOP.