Are Your Annuities Aggregated? What this IRS Rule Means for Your Withdrawal Taxes

Written by Ariel Stern Updated October 8, 2025

If you are buying multiple deferred annuities with non-qualified funds in the same year, you need to know about Annuity Aggregation Rules. These rules can change how your withdrawals are taxed when you make withdrawals, possibly leading to some unexpected tax consequences. We’re going to break down the aggregation rules for you so these tax rules don’t catch you by surprise.

What is aggregation of annuities?

The term “annuity aggregation” may seem like a complex technical term. It really just means that the value of many annuities are lumped into one single value.

For instance, if you bought two $50,000 annuities from one insurance company in the same calendar year, those annuities would be aggregated. From the IRS’s perspective, you would have one $100,000 annuity from that insurer, not two $50,000 annuities.

You can read about it from the IRS in Code Section 72(e)(12)(A)(ii). But for simplicity’s sake, let’s break it down with an example.

How does annuity aggregation affect my annuities?

The best way to address this is to consider a hypothetical. Let’s say you did buy two $50,000 annuities from the Insurance Company XYZ. You have a total of $100,000 in annuity contracts with Company XYZ. The cost basis for each contract is $50,000, or $100,000 cumulatively.

Time went by and both your annuities grew to $53,000. This means that you have a combined (or aggregate) value of $106,000 in annuities with Company XYZ. At this time you decide to use your 10% withdrawal allowance with one annuity and withdraw $5,300.

With non-qualified deferred annuities, withdrawals are taxed as interest first, often called Last-In First-Out (LIFO). Aggregation is going to affect the amount of your withdrawal that is taxable as income. Let’s explore why.

How annuity aggregation affects your taxation

Without Annuity Aggregation

Without annuity aggregation, you would be withdrawing $5,300 from one annuity contract.

Since your annuity contract is worth $53,000 at the time of withdrawal, and it was originally purchased for $50,000, that means you have $3,000 in earned interest in that contract. You might think that you are getting $3,000 of interest and $2,300 of principal paid out to you ($5,300 withdrawal - $3,000 interest = $2,300 return of premium).

Without aggregation, this would be true. As a result, you would only be taxed on the $3,000 of interest being paid out to you. The $2,300 would be a return of premium and tax-free.

With Annuity Aggregation

However, we know that the IRS considers all annuity contracts purchased from the same insurer to be aggregated (e.g. they consider them as one contract). Therefore, when you withdraw $5,300 from one contract, the IRS actually uses both annuity contracts to determine how much of the withdrawal is principal or interest.

Since each of your contracts with Company XYZ appreciated by $3,000, in aggregate you have $6,000 of interest and $100,000 in principal. Therefore, your $5,300 withdrawal is actually considered to be all interest because it is less than the combined interest of your two contracts ($6,000). As a result of aggregation rules, your $5,300 withdrawal is fully taxable.

Why does the IRS Aggregate Annuity Contracts?

Essentially, the IRS aggregates annuity contracts purchased from the same insurer so that people cannot strategically withdraw from one annuity contract and avoid paying taxes on earned interest. With aggregation, your taxable portion can be higher than without aggregation.

Are All Annuity Contracts Aggregated?

No! All annuity contracts are not aggregated for tax purposes. Annuity contracts are only aggregated if they meet these conditions:

• Purchased in the same year
• Purchased from the same insurer (or family of insurers)
• Are non-qualified deferred annuities

This means that qualified annuities and income annuities (that are not purchased via 1035 exchange) are not subject to annuity aggregation.

How Can I Tell If My Annuities Will Be Aggregated?

You can reach out to your insurance company or contact a tax professional. If you’re thinking about purchasing multiple annuity contracts, perhaps as part of an annuity ladder, contact one of our annuity experts at (866) 866-1999. We’ll walk through your annuity plans with you to help you determine if your plan will meet with your expectations. We’re here to help you.

Disclaimer: We are not tax advisors. This article is for informational purposes only and does not constitute tax advice. Please consult a certified tax professional regarding annuities and taxation.

References:

• “Aggregation of Non-Qualified Annuities” MassMutual Ascend. December 2022.
• “26 U.S. Code § 72 - Annuities; certain proceeds of endowment and life insurance contracts” Cornell Law School.
• TITLE 26—INTERNAL REVENUE CODE, Internal Revenue Service