A retirement annuity for married couples is a contract with an insurance company that turns savings into guaranteed income lasting as long as either spouse is alive. The structure most couples use is called a Joint and Survivor annuity, and setting it up well comes down to a handful of decisions: what percentage of the payment continues to the survivor, whether to add a period-certain guarantee, how the contract was funded for tax purposes, and who is named as beneficiary. Federal law also gives a non-participant spouse real power over some of these choices, so both people generally need to be at the table.
How Joint and Survivor Payouts Work
Under a Joint and Survivor (J&S) annuity, payments continue for as long as the annuitant or the designated joint annuitant is alive. Because the insurer is covering two lifespans instead of one, the starting monthly payment is lower than a single-life annuity on the same money. The younger the second spouse, the larger that reduction, since the expected payout period stretches further.
The insurer calculates the initial payment using both spouses’ ages and joint life expectancy tables. A couple where both spouses are 65 will receive a higher starting payment than a couple where one is 65 and the other is 55, because that ten-year gap extends the expected payout period significantly.
Picking the Survivor Percentage
When the annuity is set up, the couple chooses a continuation percentage that determines how much the surviving spouse will receive after the first death. The common options are 100%, 75%, and 50% of the original payment.
A 100% option keeps the payment level unchanged after the first death. It provides the strongest protection but produces the lowest initial income. A 50% option pays more upfront but cuts the survivor’s income in half. The 75% option sits in between and is where many couples land when they’re balancing current income against survivor security. There is no universally right answer. Couples with substantial Social Security or a pension already covering the survivor may accept a lower percentage; couples relying on the annuity as their main income floor usually pick higher.
Guarantees If Both Spouses Die Early
A pure J&S “life only” annuity stops all payments the moment the second spouse dies. If both spouses die in an accident two years into the contract, the remaining principal is forfeited to the insurance company. A Period Certain clause solves this by guaranteeing payments for a minimum number of years, typically 10 or 20, regardless of whether either spouse is still alive. If both die within that window, a named beneficiary collects the remaining guaranteed payments. The starting monthly payment is slightly lower than the pure life-only version.
Keeping Up With Inflation
A fixed payment that feels comfortable at 65 can lose serious purchasing power by 85. Even 3% annual inflation cuts a dollar’s value roughly in half over 25 years. Some contracts offer a Cost of Living Adjustment (COLA) rider that increases payments each year by a fixed percentage or by tracking the Consumer Price Index. The starting payment is noticeably lower in exchange, since the insurer front-loads the cost of those future increases. Whether the tradeoff is worth it depends on how long the couple expects to need income and how much other inflation-protected income, like Social Security, is already in place.
Spousal Consent and Legal Rights
Federal law gives a non-participant spouse significant rights over retirement annuity benefits, especially when they come from an employer plan. These protections exist so that a working spouse cannot unilaterally redirect an entire retirement benefit away from the other spouse.
The Qualified Joint and Survivor Annuity Rule
Under ERISA, defined benefit plans, money purchase plans, and certain other qualified plans must pay benefits as a Qualified Joint and Survivor Annuity (QJSA) by default for married participants. The QJSA must give the surviving spouse between 50% and 100% of the payment amount the participant received during their lifetime.1Internal Revenue Service. Retirement Topics – Qualified Joint and Survivor Annuity
A participant who wants a different form, such as a single-life annuity or a lump sum, can only elect it if the spouse provides written consent witnessed by a plan representative or notary.1Internal Revenue Service. Retirement Topics – Qualified Joint and Survivor Annuity The consent has to affirmatively agree to give up guaranteed survivor income and identify the specific alternative benefit chosen. Without that, the plan is legally required to pay out as a QJSA regardless of what the participant requests.
Non-Qualified Annuities and Community Property
Annuities bought with after-tax money outside an employer plan are not subject to the QJSA requirement. The owner generally has full control over beneficiary designations and payout elections. In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), assets acquired during marriage are presumed to be jointly owned.2Internal Revenue Service. Publication 555 – Community Property A non-owner spouse in one of these states may have a legal ownership interest in the annuity requiring their consent before the owner changes beneficiaries or surrenders the contract. Naming the spouse as sole primary beneficiary matters here for another reason too: it unlocks the most favorable tax continuation options after the owner’s death.
How Payments Are Taxed
The tax treatment of a married couple’s annuity payments depends almost entirely on whether the contract was funded with pre-tax or after-tax dollars. That single distinction creates two very different frameworks.
Non-Qualified Annuities
Non-qualified annuities, purchased with money that was already taxed, use an exclusion ratio to split each payment between a tax-free return of principal and taxable earnings. The ratio is the total investment in the contract divided by the expected return over the payment period.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts For a joint annuity, the expected return is based on the couple’s combined life expectancy, which spreads the tax-free portion across a longer period.
If a couple invested $200,000 in a contract with an expected return of $400,000 over their joint lifetimes, the exclusion ratio would be 50%. Half of every payment would be tax-free, and half would be taxed as ordinary income. Once the full $200,000 investment has been recovered, every subsequent payment becomes fully taxable.4Internal Revenue Service. Publication 575 – Pension and Annuity Income If both annuitants die before recovering the full investment, the unrecovered amount can be claimed as a deduction on the last annuitant’s final tax return.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
Qualified Annuities
Qualified annuities funded through rollovers from 401(k) plans, traditional IRAs, or similar accounts received a tax deduction going in. The IRS hasn’t collected income tax on any of that money. Every dollar of every payment is taxed as ordinary income. There is no exclusion ratio and no tax-free portion. Both original contributions and all growth are fully taxable when distributed.
Early Withdrawal Penalties
Withdrawals from either type of annuity before age 59½ trigger a 10% additional tax on the taxable portion.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The penalty is separate from regular income tax, so an early withdrawal from a qualified annuity could face both ordinary income tax and the 10% surcharge on top of it. Common exceptions that eliminate the penalty include:
- Distributions after the account owner or annuitant dies.
- Total and permanent disability.
- A series of substantially equal periodic payments calculated under IRS-approved methods.
- Payments to a former spouse under a qualified domestic relations order (qualified plans only).
RMDs When One Spouse Is Much Younger
Owners of qualified retirement accounts, including qualified annuities held inside IRAs, must begin taking Required Minimum Distributions at age 73. Under the SECURE 2.0 Act, the starting age increases to 75 for individuals who would turn 73 after December 31, 2032, which effectively means those born in 1960 or later.6Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
The standard RMD divides the account balance by a factor from the IRS Uniform Lifetime Table. There is a useful exception for married couples: when the sole beneficiary is a spouse more than 10 years younger than the owner, the owner can use the Joint Life and Last Survivor Expectancy Table instead. That produces a longer life expectancy factor, a smaller required distribution, and a lower tax bill.7Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) – Section: Calculating the Required Minimum Distribution For a 75-year-old with a 60-year-old spouse, the difference can cut the annual RMD by thousands of dollars.
The exception only applies when the spouse is the sole beneficiary for the entire year. Name a trust, a child, or anyone else as co-beneficiary and the standard table applies.8Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs) – Section: Figuring the Owner’s Required Minimum Distribution
What Happens When the First Spouse Dies
The first death is the moment that tests whether the annuity was set up correctly. Beneficiary designations control what happens next, and mistakes here can trigger an immediate tax bill that a proper setup would have avoided entirely.
Spousal Continuation for Deferred Annuities
When the owner of a deferred annuity dies before payments have begun, the tax code normally requires the entire value to be distributed within five years. The critical exception: if the sole beneficiary is the surviving spouse, that spouse can step into the contract as the new owner.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Spousal continuation preserves the contract’s tax-deferred status entirely. No distribution is required, no taxes are triggered, and the surviving spouse can keep growing the account, annuitize it later based on their own life expectancy, or hold onto any guaranteed income riders attached to the original contract.
Continuation of J&S Payments
If the annuity was already paying income under a J&S structure, the transition is automatic. Payments continue to the surviving spouse at the pre-selected continuation percentage. If the couple chose 75%, the survivor’s payment drops to 75% of the original amount. The survivor contacts the insurance company and provides a certified death certificate to update the records, but the income stream itself doesn’t stop.
No Step-Up in Basis on Inherited Annuities
Inherited annuities do not get the step-up in basis that applies to inherited stocks or real estate. The tax code specifically excludes annuities described in IRC Section 72 from step-up treatment.9Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent Untaxed gains inside the contract remain taxable as income in respect of a decedent under IRC Section 691, and the surviving spouse will owe ordinary income tax on those gains when they’re eventually distributed.10Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents
This matters more than couples expect. A non-qualified annuity purchased for $200,000 that has grown to $350,000 carries $150,000 in deferred gains. Those gains don’t vanish at death. The survivor pays income tax on them, whether through continued annuity payments, a lump sum, or any other distribution method.
Fees That Erode Both Spouses’ Income
Annuity fees compound quietly over decades and can meaningfully reduce the income available to both spouses. Three categories cover most of them.
Mortality and Expense (M&E) risk charges are annual fees deducted from variable annuity accounts to cover insurance guarantees and administrative costs. They typically range from about 0.40% to 1.75% of account value per year. Investment management fees for the underlying funds sit on top of that, so total annual costs on a variable annuity can exceed 2% to 3% before any optional riders.
Surrender charges apply when money is withdrawn during the early years of a deferred annuity. A typical surrender period lasts six to eight years, starting around 6% to 7% of the withdrawal and declining by roughly one percentage point each year until it reaches zero. Most contracts allow penalty-free withdrawals of up to 10% of account value annually, even during the surrender period. Once the surrender period ends, withdrawals carry no company-imposed fee, though tax penalties may still apply if the owner is under 59½.
Optional riders (COLA, guaranteed minimum withdrawal benefits, enhanced death benefits) each add their own annual charge, commonly 0.5% to 1.5% of contract value per year. Riders covering two lives often cost more than their single-life equivalents. Before adding a rider, compare the total annual cost against the realistic benefit. A guaranteed income rider that costs 1.25% per year needs to deliver substantial value over the life of the contract to justify eroding the underlying balance year after year.
Swapping a Bad Contract With a 1035 Exchange
A couple locked into a high-fee or underperforming annuity can move to a different contract through a 1035 exchange, which defers all taxes on the accumulated gains. The exchange has to be direct, from one insurance company to another, with no money passing through the owner’s hands. The new contract must cover the same owner and annuitant as the old one. A 1035 exchange resets the surrender period, so a couple escaping high surrender charges on one contract may face a new surrender schedule on the replacement. The tax basis carries over, so the deferred gains don’t disappear; they continue growing tax-deferred under the new contract.