Question

Peter Seaman, at age 45, purchased an annuity which will pay him $250 a month for life once he reaches age 65. He paid in $25,000. At retirement, he will have quarterly payments from the annuity. Peter receives his first annuity payment three months after the starting date January 20). Perform the calculations and determine what amoUnt he may exclude from gross income. What was the exclusion ratio

Answer 1

41.67%

Step-by-step explanation:

Assuming that Peter purchased this annuity using after tax money, we must first try to determine an approximate life span for him. We can assume that Peter expects to life up to age 85, which means that he will receive annuity payments for 20 years after retiring (IRS table V). Since he will receive quarterly payments, the total number of distributions = 20 x 4 = 80.

Peter will be able to exclude $25,000 / 80 payments = $312.50 from each quarterly payment that he gets.

each quarterly payment = $250 x 3 = $750

exclusion ratio = $312.50 / $750 = 41.67%