What Does the Annuity Commencement Date Mean?

The annuity commencement date is the day your annuity contract stops accumulating and starts paying you income. Federal tax law calls it the “annuity starting date” and defines it as the first day of the first period for which you receive a payment.¹ On that date, three things change at once: your money shifts from growing tax-deferred to paying out, the tax treatment of every dollar you receive changes, and in most cases you lose the ability to pull the balance as a lump sum. The decision is largely irreversible, which is why it matters.

The Statutory Definition

Section 72(c)(4) of the Internal Revenue Code defines the annuity starting date as “the first day of the first period for which an amount is received as an annuity under the contract.”¹ Insurance companies and advisors tend to say “commencement date”; the IRS says “starting date.” Same event.

For a deferred annuity, this is a future date you generally choose. For an immediate annuity, it arrives within the first year of purchase. Before the date, your money accumulates inside the contract with no current tax on the gains. After it, the insurer sends you periodic payments and a different set of tax rules governs each one.

What Triggers the Date

Three things can push you to the commencement date. You control one of them.

Your Own Election

Most deferred annuity owners set the date by notifying the insurer and choosing a payout option. The insurer then calculates your payment based on the accumulated value, your age, prevailing interest rates, and the structure you pick. This is the clean case: you decide on your timeline.

The Contract’s Maximum Age

Nearly every deferred annuity contract sets a maximum age by which payments must begin, typically somewhere between 85 and 95. If you haven’t elected a start date by then, the insurer will annuitize the contract automatically and start sending checks under a default payout option. That default may not be the one you would have chosen, so it’s worth checking your contract’s maximum age long before you get there.

Required Minimum Distributions

Annuities held inside traditional IRAs, 401(k)s, and other tax-qualified accounts are subject to required minimum distributions, currently starting at age 73 for most people and rising to 75 for those born in 1960 or later.² RMDs don’t force you to annuitize; you can satisfy them through partial withdrawals. But once annuity payments from a qualified contract have begun, those payments count toward the RMD.

What Changes When Payments Begin

Before the commencement date, your contract has a cash value. You can surrender it (possibly paying charges), borrow against it, or move it to a different product through a tax-free exchange. After the date, the insurer converts that balance into a promise of future payments using actuarial calculations tied to your life expectancy, the chosen payout structure, and current interest rates.³

That conversion is called annuitization, and it takes away access to the underlying principal as a lump sum. Optional riders and guaranteed-minimum benefit features typically end at annuitization, replaced by the fixed terms of your payout election. The payment amount is locked in based on the conditions at that moment. Annuitizing when interest rates are low means permanently lower payments.

Payout Options That Get Locked In

The payout structure you choose at commencement controls both your payment size and what happens to the money if you die. Once payments start, the choice is fixed.

Life only. Payments continue for your lifetime and stop at your death. No beneficiary receives anything. Because the insurer’s obligation ends with you, this produces the highest monthly payment.
Life with period certain. Payments continue for your lifetime, but if you die inside a guaranteed period (often 10 or 20 years), your beneficiary collects the remaining scheduled payments. The monthly amount is lower than life-only.
Joint and survivor. Payments continue for the lifetimes of both you and a second person, usually a spouse. The insurer uses combined life expectancy, which produces a lower payment than a single-life payout.³

A life-only election that maximizes income can leave a surviving spouse with nothing if the annuitant dies early. A joint-and-survivor election for someone with no dependents trades income for a benefit no one uses. There is no undo.

How Your Payments Are Taxed After Commencement

Once payments start, the tax treatment depends on whether the annuity was funded with pre-tax or after-tax dollars.

Qualified Annuities

Annuities inside traditional IRAs, 401(k)s, and similar tax-deferred accounts were funded with money that has never been taxed. Every dollar you receive after the commencement date is ordinary income at your regular rate. There is no tax-free portion because there was no after-tax investment to recover.

Non-Qualified Annuities

Annuities purchased with after-tax money are split. You already paid tax on the premiums, so the IRS doesn’t tax that piece again. Each payment carries a taxable portion (the earnings) and a tax-free portion (return of your original investment). The formula is called the exclusion ratio.³

Divide your total investment in the contract by the expected return over your lifetime; expected return equals your annual payment multiplied by a life expectancy factor from IRS actuarial tables. If you invested $60,000 and the expected return is $120,000, your exclusion ratio is 50%: half of each payment is tax-free, half is ordinary income. Once you’ve recovered your entire cost basis through those tax-free portions, every payment after that is fully taxable.³ The insurer reports the taxable share to you and the IRS on Form 1099-R.

Pulling Money Out Before the Commencement Date

Taking money out before age 59½ triggers a 10% additional tax on the taxable portion of the withdrawal, in addition to any regular income tax owed. The penalty applies to both qualified and non-qualified annuities. Several exceptions eliminate it:¹

Distributions to a beneficiary after the owner’s death.
Distributions after the owner becomes disabled as defined by the tax code.
A series of substantially equal periodic payments based on life expectancy, taken at least annually. These are sometimes called 72(q) or 72(t) payments.
Immediate annuities, which are exempt from the early withdrawal penalty.

The IRS penalty is separate from surrender charges. Surrender charges are contractual fees the insurer imposes for early withdrawals, typically declining over the first seven to ten years of the contract. You can owe both on the same withdrawal.

Changing or Delaying the Date

1035 Exchange

If your current contract has features you’ve outgrown, Section 1035 of the Internal Revenue Code lets you move the entire balance into a new annuity contract with no taxable gain recognized on the exchange. Your cost basis carries over, and the new contract has its own accumulation period and its own future commencement date. The same provision also permits exchanging an annuity for a qualified long-term care insurance policy.⁴

Two cautions. The exchange must go directly between insurance companies; if the money passes through your hands, the IRS treats it as a taxable distribution followed by a new purchase. And a new contract may bring a fresh surrender-charge period and terms that reflect your current age and current rates rather than the ones you had before.

Qualified Longevity Annuity Contract

A Qualified Longevity Annuity Contract, or QLAC, is a deferred annuity built to push income further into retirement. The amount invested in a QLAC is excluded from the account balance used to calculate your RMDs, so it doesn’t produce required distributions while it sits there growing. Federal rules cap the QLAC commencement date at the first day of the month after you turn 85, and the total premium across all your retirement accounts is limited to $210,000 for 2026, adjusted annually for inflation.⁵

Partial Annuitization

You don’t have to annuitize everything at once. Section 72(a)(2) lets you convert only a portion of the contract into an income stream while the rest keeps accumulating. The annuitized portion must pay out over at least 10 years or over one or more lifetimes. The IRS treats that portion as a separate contract with its own commencement date, and your cost basis is allocated proportionally so each piece is taxed under its own exclusion ratio.¹

If You Die Before the Commencement Date

If you die during the accumulation phase, the contract’s death benefit passes to your named beneficiary. In most cases that is the full accumulated value, though some contracts pay an enhanced amount if you bought that rider. Inherited annuity distributions are not subject to the 10% early withdrawal penalty regardless of the beneficiary’s age.⁶ For annuities inside qualified retirement plans, federal law may require the death benefit to be paid to a surviving spouse as a qualified pre-retirement survivor annuity.⁷

Dying after the commencement date is a different story. Your beneficiary’s rights are whatever you selected at annuitization. A life-only election means no payments to anyone after you die. A period-certain or joint-and-survivor election preserves some payments, but only on the terms locked in the day payments began.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
3
Internal Revenue Service. Publication 939 (12/2025), General Rule for Pensions and Annuities
4
Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies
5
Internal Revenue Service. Instructions for Form 1098-Q (04/2025)
6
Internal Revenue Service. Retirement Topics – Beneficiary
7
Internal Revenue Service. Retirement Topics – Qualified Pre-Retirement Survivor Annuity (QPSA)