An annuity due pays at the beginning of each period; an ordinary annuity pays at the end. That is the entire distinction between an annuity due vs. an ordinary annuity, and every other difference between the two follows from it. Because each annuity due payment arrives one period sooner, the whole stream is worth more than an otherwise identical ordinary annuity: more to the person receiving it, more expensive to the person paying it.
How the Payment Timing Works
Picture a contract for twelve monthly payments starting in January. Under an ordinary annuity, the first payment lands on January 31. Under an annuity due, it lands on January 1. Every following payment follows the same rule, shifted by one full period.
The ordinary annuity assumes you use something first and pay for it afterward. A mortgage fits that pattern: you live in the house for a month, then the payment comes due. An annuity due reverses the order. You pay, then receive the benefit. Rent fits that pattern: you pay on the first, then occupy the apartment for the month.
Same payment amount. Same number of payments. Same interest rate. The only variable is whether each payment lands at the start or end of its period.
Why the Timing Shift Changes the Dollar Amount
Money earns a return over time, so $5,000 today is worth more than $5,000 a year from now. That is the time value of money, and it is why a one-period shift in payment timing produces meaningfully different totals.
In an annuity due, every payment arrives one period earlier than it would in an ordinary annuity, so every payment gets one additional period to earn interest. The effect compounds across the whole series, not just the first payment. The math ties the two together cleanly: multiply the ordinary annuity’s value by (1 + the periodic interest rate) to get the annuity due’s value. That multiplier accounts for the extra compounding cycle.
A Worked Example
Suppose you invest $5,000 per year for 10 years at a 6% annual return. Under an ordinary annuity, with payments at year-end, the future value is roughly $65,904. Under an annuity due, with payments at the start of each year, the future value is roughly $69,858. You contributed the same $50,000 in both cases, but the annuity due produces about $3,954 more.
The same logic runs in reverse for present value. If someone promises you $5,000 a year for 10 years and you discount at 6%, the ordinary annuity stream is worth about $36,800 today. The annuity due stream is worth about $39,008. The annuity due is more valuable to the recipient because each payment arrives sooner and is therefore discounted less heavily.
The gap grows with higher interest rates, larger payments, and longer timeframes. At low rates over short periods, the difference can feel trivial. In estate planning, structured settlements, and long-duration commercial leases, the same distinction can swing valuations by tens of thousands of dollars.
Contracts That Use an Ordinary Annuity
Most consumer debt and most investment income streams follow the ordinary annuity model, where you pay or receive at the end of each period.
- Mortgages and car loans. Your first mortgage payment typically falls 30 to 60 days after closing, and each subsequent payment covers the interest that accrued over the previous month. Federal rules under the Truth in Lending Act require lenders to disclose the projected payment schedule, including the timing and amount of each periodic payment, on the Loan Estimate before you close.1eCFR. 12 CFR 1026.37 – Content of Disclosures for Certain Mortgage Transactions
- Bond coupon payments. The issuer pays interest at the end of each semi-annual or annual period. You lend the money first; the coupon compensates you for the time your capital was at work.
- Social Security retirement benefits. Benefits for a given month are paid in the following month, not in advance. The Social Security Administration schedules payment dates based on your birth date, with most recipients receiving funds on the second, third, or fourth Wednesday of the month after the benefit month.2Social Security Administration. Schedule of Social Security Benefit Payments 2026
Contracts That Use an Annuity Due
Contracts where you pay before receiving the service tend to follow the annuity due model.
- Rent. Most residential and commercial leases require payment on the first of the month, before the tenant occupies the space for that period.
- Insurance premiums. Coverage stays active only if you pay the premium at the beginning of the coverage period. If you fall behind, insurers generally must offer a grace period before canceling the policy. For marketplace health plans with premium tax credits, the grace period is 90 days; for plans without those credits, the standard practice is roughly 31 days, though state rules vary.
- Equipment and vehicle leases. Businesses leasing machinery or a fleet of vehicles typically pay at the start of each month for the right to use the asset during the upcoming period.
Across these arrangements, the provider wants money in hand before delivering anything. A landlord who hands over keys before collecting rent, or an insurer who pays claims before receiving premiums, carries the risk that the other party never pays.
Why the Distinction Matters in Estate Planning
The choice between ordinary annuity and annuity due becomes high-stakes when the IRS assigns a present value to a stream of payments. Charitable remainder annuity trusts, grantor-retained annuity trusts (GRATs), and outright transfers of annuity interests all require a valuation for gift or estate tax purposes.
The IRS uses the Section 7520 interest rate to discount those future payments to present value. The rate is recalculated monthly and equals 120% of the federal midterm rate, rounded to the nearest two-tenths of a percent. For early 2026, that rate has been 4.6% to 4.8%.3Internal Revenue Service. Section 7520 Interest Rates The regulations require the use of IRS actuarial tables to value annuity interests, life estates, and remainder interests.4eCFR. 26 CFR 20.7520-1 – Valuation of Annuities, Unitrust Interests, Interests for Life or Terms of Years, and Remainder or Reversionary Interests
Whether the payments arrive at the start or end of each period changes the present value, which then changes how much of the transfer counts as a taxable gift. A GRAT structured with beginning-of-period payments produces a higher annuity value and a lower taxable gift than the same trust structured with end-of-period payments. Getting the timing wrong on the return can produce an underpayment.
Does the Timing Change Your Taxes?
You might expect start-of-period versus end-of-period payments to be taxed differently. They are not. The IRS taxes annuity income the same way regardless of when in the period the payment lands. What matters is the type of plan the annuity comes from and how your cost basis is recovered.5Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income
Timing does matter in one narrow way: constructive receipt. Under federal tax regulations, income counts as received in the year it becomes available to you, even if you leave the money untouched. A payment credited to your account on December 31 is that year’s income whether or not you withdraw it.6eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income An annuity due whose annual payment falls on January 1 rather than December 31 pushes that income into the next tax year. Small distinction most years, real one when the sums are large.
How to Tell Which One You Have
Contracts almost never use the phrases “ordinary annuity” or “annuity due.” Look instead for language about when payments are due within each period. “On the first of each month” or “in advance” signals an annuity due. “At the end of each month,” “in arrears,” or a due date at the close of the period signals an ordinary annuity.
Loan amortization schedules are the clearest tell. Check whether interest accrues before or after each payment. On a standard mortgage, the first payment falls well after the loan funds, confirming the ordinary annuity structure. On a prepaid lease, the first payment is collected at signing, confirming an annuity due.
When the contract is genuinely ambiguous, most calculations default to ordinary annuity. Actuaries, accountants, and financial software all treat end-of-period payments as the baseline. If you are the one receiving payments, though, confirm the actual structure rather than assuming, because the annuity due produces a higher present value that can change what you are owed in a settlement, a buyout, or a divorce.