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Section 72(s) · Non-Qualified Stretch

The lump sum is the tax bomb.
The stretch is the legacy.

Most beneficiaries of non-qualified annuities are forced into a lump sum that detonates decades of deferred gain in a single year. The stretch keeps the contract alive — and the math compounds.

Case Inputs
$
Current account value at death
$
Premium paid (return of basis is tax-free)
Drives IRS Single Life expectancy
%
Annual crediting / portfolio return
Beneficiary's filing status
$
Beneficiary's wages + other ordinary income, pre-inheritance
2026 Federal Brackets · Reference
Where each path's tax actually lands
Base income Lump stack Stretch (yr 1)
Rates per IRS Rev. Proc. 2025-32 (tax year 2026). Brackets adjust annually for inflation.
Two Paths

One detonates the gain in year one.
The other lets it compound.

vs.
Path A · The Tax Bomb
Forced lump sum
All gain recognized in year one, taxed at ordinary rates. Net proceeds reinvested in a taxable account with normal tax drag.
Foundation
Contract value
—
Cost basis
—
Taxable gain
— —
The Hit
Immediate tax bill
— —
Net after tax
— —
Reinvestment growth
— —
Total wealth to family
—
Path B · The NQ Stretch
Section 72(s) stretch
Beneficiary takes payments over life expectancy. Contract stays invested tax-deferred. Each payment is partly tax-free return of basis.
Foundation
Contract value
—
Cost basis
—
Exclusion ratio
— —
Stretch period
— —
Year One Payment
Gross payment
— —
Tax-free portion
— —
Tax due year one
— —
Lifetime
After-tax payments received
— —
Reinvested payment growth
— —
Total wealth to family
—
Cumulative wealth, year by year
Total dollars in the family. Both paths assume after-tax dollars are reinvested at the same rate — the divergence is the deferral.
Lump sum path
NQ Stretch path
The Power Revealed
The stretch generates more for the family.
—
Additional dollars vs. the forced lump sum
—
Tax deferred year one
—
Stretch-to-lump multiple
—
Year stretch period
The Schedule

Year by year, the tax-free basis and taxable gain in each payment.

Each annual payment is split between a tax-free return of basis (the exclusion ratio) and ordinary-income taxable gain. This is the same money flowing through Path B above — broken out so an advisor or CPA can see exactly what hits the beneficiary's 1099-R each year.

Methodology note: Exclusion ratio is applied as cost basis ÷ contract value at inception (a simplified §72(b) interpretation that mirrors most carrier illustrations). Actual carrier methodology and IRS treatment of expected return calculations may vary; figures are illustrative.

Total Payments
—
Tax-Free Basis
—
Taxable Gain
—
Net After Tax
—
Year Age Payment Tax-Free Taxable Tax Due Net After Tax
Reference

IRS Single Life Expectancy Table

Used to determine the stretch period for non-spouse beneficiaries under IRC §72(s). The age below is the beneficiary's attained age in the year following the original owner's death. Reference: IRS Pub. 590-B (2022 update).

—
For financial professional use only. Not intended for use with the general public. Hypothetical illustration based on user-supplied assumptions and assumes constant rates of return — actual results will vary. Section 72(s) treatment, exclusion ratio mechanics, and stretch eligibility depend on carrier and contract specifics. Exclusion ratio is calculated as cost basis ÷ contract value at inception (a simplified §72(b) interpretation); the IRS's expected-return method may yield a different ratio. Not tax or legal advice. Clients should consult a qualified tax advisor or attorney regarding their individual situation.
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