Let's see how this works:

1. Say the client buys a $28,700 SPIA providing annual income of $6,544 for a specified five-year period. Unlike a CD, only a portion of this income is taxable. Calculating the exclusion ratio, we determine that 88 percent of each payment is a tax-free return of principal. This means only $785 is taxable, leaving your client in a 28 percent tax bracket with $6,324 in net after-tax income, compared to $5,040 net after-tax from the CD.
2. The balance of the $100,000 – $71,300 – is placed in a SPDA earning 7 percent. The SPDA grows on a tax-deferred basis and is worth the original $100,000 at the end of the five years. The split-funded approach could again be used for another period of time.

   Keep in mind that, in this event, a greater portion of the annuity income will be taxable, since a portion of the $100,000 now represents tax-deferred growth.

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